**U.S.SECURITIES AND EXCHANGE COMMISSION**WASHINGTON, D.C.  20549

# **FORM 10-Q**

| **(Mark One)**                                                                                                                                                  |                                                                                          | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------|------------|
|                                                                                                                                                            |                                                                                          |       |
| **x**                                                                                                                                                           | **Quarterly report pursuant to Section 13 or 15(d)  of the Securities Exchange Act of 1934**  |
|                                                                                                                                                            |                                                                                          |       |
| **For the quarterly period ended June 29, 2007 or**                                                                                                             |
|                                                                                                                                                            |                                                                                          |       |
| **o**                                                                                                                                                           | **Transition report pursuant to Section 13 or  15(d) of the Securities Exchange Act of 1934** |
|                                                                                                                                                            |                                                                                          |       |
| **For the transition period from             to          ** |
|                                                                                                                                                            |                                                                                          |       |
| **Commission file number: 000-30575**                                                                                                                           |

 

**AVOCENTCORPORATION**

(Exact Name ofRegistrant as Specified in Its Charter)

| **Delaware**                                                    |   | **91-2032368**                           |
|-----------------------------------------------------------------|--------|------------------------------------------|
| (State or Other  Jurisdiction of Incorporation or Organization) |   | (I.R.S. Employer  Identification Number) |
|                                                            |   |                                     |
| **4991  Corporate Drive   Huntsville, Alabama**                 |   | **35805**                                |
| (Address of  Principal Executive Offices)                       |   | (Zip Code)                               |

 

**256-430-4000**

(Registrant’sTelephone Number, Including Area Code)

Indicate by checkmark whether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934, as amended, duringthe preceding 12 months (or for such shorter period that the registrant wasrequired to file such reports) and (2) has been subject to such filingrequirements for the past 90 days.

xYes o No

Indicate by checkmark whether the Registrant is a large accelerated filer, an accelerated filer,or a non-accelerated filer. (See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Securities Exchange Acto.)
| Large Accelerated filer x | Accelerated Filer  o | Non- Accelerated  filer o |
|---------------------------|----------------------|---------------------------|

 

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of theAct): Yes  o   No  x

As ofAugust 1, 2007, the number of outstanding shares of the Registrant’s CommonStock was 50,291,859.

 

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**AVOCENT CORPORATION**

**FORM 10-Q**

**June 29,2007**

**INDEX**
| Part  I    Financial Information |     |                                                                                                                 |
|------------------------------------------------------|----------|----------------------------------------------------------------------------------------------------------------------|
|                                                 |     |                                                                                                                 |   |   |
|                                                 | Item 1.  | Financial Statements  (unaudited)                                                                                    |   |   |
|                                                 |     |                                                                                                                 |   |   |
|                                                 |     | Consolidated  Statements of Income for the Three and Six Months Ended June 29, 2007 and  June 30, 2006               |   |   |
|                                                 |     | Consolidated Balance  Sheets at June 29, 2007 and December 31, 2006                                                  |   |   |
|                                                 |     | Condensed  Consolidated Statements of Cash Flows for the Six Months Ended June 29, 2007  and June 30, 2006 |   |   |
|                                                 |     |                                                                                                                 |   |   |
|                                                 |     | Notes to  Condensed Consolidated Financial Statements                                                                |   |   |
|                                                 |     |                                                                                                                 |   |   |
|                                                 | Item 2.  | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                          |   |   |
|                                                 |     |                                                                                                                 |   |   |
|                                                 | Item 3.  | Quantitative  and Qualitative Disclosures about Market Risks                                                         |   |   |
|                                                 |     |                                                                                                                 |   |   |
|                                                 | Item 4.  | Controls and  Procedures                                                                                             |   |   |
|                                                 |     |                                                                                                                 |   |   |
| Part  II    Other Information    |     |                                                                                                                 |
|                                                 |     |                                                                                                                 |   |   |
|                                                 | Item 1.  | Legal Proceedings                                                                                                    |   |   |
|                                                 |     |                                                                                                                 |   |   |
|                                                 | Item 1A. | Risk  Factors                                                                                                        |   |
|                                                 |     |                                                                                                                 |   |   |
|                                                 | Item 2.  | Unregistered  Sales of Equity Securities and Use of Proceeds                                                         |   |   |
|                                                 |     |                                                                                                                 |   |   |
|                                                 | Item 6.  | Exhibits                                                                                                             |   |   |
|                                                 |     |                                                                                                                 |   |   |
| Signature                                            |     |                                                                                                                 |

 

2

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**PART I —FINANCIAL INFORMATION**

**Item1.  Financial Statements**

**AVOCENTCORPORATION**

**CONSOLIDATEDSTATEMENTS OF INCOME**

(Unaudited, in thousands, except per share data)
| ** **                                                                                                                                                                                                               | ** ** | **For the three months ended** | ** ** | **For the six months ended** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                                                                                                                                                               | ** ** | **June 29,**                                  | ** ** | **June 30,**                                | ** ** | **June 29,** | ** ** | **June 30,** | ** ** |
| ** **                                                                                                                                                                                                               | ** ** | **2007**                                           | ** ** | **2006**                                         | ** ** | **2007** | ** ** | **2006** | ** ** |
| Net sales:                                                                                                                                                                                                               |       |                                               |       |                                             |       |   |   |   |   |
| Products and  services                                                                                                                                                                                                   |       | $                                                  | 125,407    |                                             | $          | 111,009 |   | $ | 238,983 |   | $ | 199,199 |   |
| Licenses and  royalties                                                                                                                                                                                                  |       | 24,818                                             |       | 6,996                                            |       | 44,393 |   | 13,318 |   |
| Total net sales                                                                                                                                                                                                          |       | 150,225                                            |       | 118,005                                          |       | 283,376 |   | 212,517 |   |
|                                                                                                                                                                                                                     |       |                                               |       |                                             |       |   |   |   |   |
| Cost of sales:                                                                                                                                                                                                           |       |                                               |       |                                             |       |   |   |   |   |
| Products and  services                                                                                                                                                                                                   |       | 51,778                                             |       | 46,595                                           |       | 100,872 |   | 85,150 |   |
| Licenses and  royalties                                                                                                                                                                                                  |       | 598                                                |       | —                                           |       | 957 |   | — |   |
| Amortization of  intangibles related to licenses and royalties                                                                                                                                                           |       | 2,767                                              |       | —                                           |       | 5,450 |   | — |   |
| Total cost of sales (including stock compensation of $301 and  $480 for the three and six months ended June 29, 2007; $164 and $214 for the  three and six months ended June 30, 2006)                                   |       | 55,143                                             |       | 46,595                                           |       | 107,279 |   | 85,150 |   |
|                                                                                                                                                                                                                     |       |                                               |       |                                             |       |   |   |   |   |
| Gross profit                                                                                                                                                                                                             |       | 95,082                                             |       | 71,410                                           |       | 176,097 |   | 127,367 |   |
|                                                                                                                                                                                                                     |       |                                               |       |                                             |       |   |   |   |   |
| Research  and development expenses (including stock compensation of $1,391 and  $2,506 for the three and six months ended June 29, 2007; $762 and $1,063 for  the three and six months ended June 30, 2006)              |       | 21,189                                             |       | 14,321                                           |       | 42,070 |   | 27,530 |   |
| Acquired in-process  research and development expense                                                                                                                                                                    |       | —                                             |       | —                                           |       | — |   | 2,100 |   |
| Selling,  general and administrative expenses (including stock compensation of  $3,411 and $5,779 for the three and six months ended June 29, 2007; $1,796  and $2,286 for the three and six months ended June 30, 2006) |       | 52,442                                             |       | 32,718                                           |       | 101,102 |   | 56,102 |   |
| Cyclades integration  expenses                                                                                                                                                                                           |       | —                                             |       | 2,269                                            |       | — |   | 2,269 |   |
| Amortization of  intangible assets                                                                                                                                                                                       |       | 7,581                                              |       | 4,901                                            |       | 16,543 |   | 7,252 |   |
| Total operating  expenses                                                                                                                                                                                                |       | 81,212                                             |       | 54,209                                           |       | 159,715 |   | 95,253 |   |
|                                                                                                                                                                                                                     |       |                                               |       |                                             |       |   |   |   |   |
| Income from operations                                                                                                                                                                                                   |       | 13,870                                             |       | 17,201                                           |       | 16,382 |   | 32,114 |   |
|                                                                                                                                                                                                                     |       |                                               |       |                                             |       |   |   |   |   |
| Net investment income                                                                                                                                                                                                    |       | 904                                                |       | 2,114                                            |       | 1,783 |   | 5,205 |   |
| Net realized investment  gains (losses)                                                                                                                                                                                  |       | —                                             |       | 2                                                |       | — |   | (53 | ) |
| Interest expense                                                                                                                                                                                                         |       | (2,268                                             | )          | (137                                             | )          | (4,502 | ) | (146 | ) |
| Other income (expense),  net                                                                                                                                                                                             |       | 15                                                 |       | (200                                             | )          | (302 | ) | (211 | ) |
|                                                                                                                                                                                                                     |       |                                               |       |                                             |       |   |   |   |   |
| Income before income  taxes                                                                                                                                                                                              |       | 12,521                                             |       | 18,980                                           |       | 13,361 |   | 36,909 |   |
| Provision (benefit) for  income taxes                                                                                                                                                                                    |       | (2,479                                             | )          | 5,399                                            |       | (2,385 | ) | 10,395 |   |
|                                                                                                                                                                                                                     |       |                                               |       |                                             |       |   |   |   |   |
| Net income                                                                                                                                                                                                               |       | $                                                  | 15,000     |                                             | $          | 13,581 |   | $ | 15,746 |   | $ | 26,514 |   |
|                                                                                                                                                                                                                     |       |                                               |       |                                             |       |   |   |   |   |
| Earnings per share:                                                                                                                                                                                                      |       |                                               |       |                                             |       |   |   |   |   |
| Basic                                                                                                                                                                                                                    |       | $                                                  | 0.30       |                                             | $          | 0.28 |   | $ | 0.31 |   | $ | 0.55 |   |
| Diluted                                                                                                                                                                                                                  |       | $                                                  | 0.29       |                                             | $          | 0.28 |   | $ | 0.31 |   | $ | 0.54 |   |
| Weighted average shares  used in computing earnings per share:                                                                                                                                                           |       |                                               |       |                                             |       |   |   |   |   |
| Basic                                                                                                                                                                                                                    |       | 50,476                                             |       | 47,943                                           |       | 50,607 |   | 48,515 |   |
| Diluted                                                                                                                                                                                                                  |       | 51,158                                             |       | 48,709                                           |       | 51,457 |   | 49,336 |   |

 

See notesaccompanying these condensed consolidated financial statements.

3

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**AvocentCorporation**

**Consolidated Balance Sheets**

**June 29, 2007 and December 31, 2006**

**(Unaudited,in thousands, except per share data)**
| ** **                                                                                                                                                                                                   | ** ** | **June 29,  2007** | ** ** | **December 31,  2006** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| **ASSETS**                                                                                                                                                                                                   | ** ** | ** **              | ** ** | ** **                  | ** ** |
| Current assets:                                                                                                                                                                                              |       |                    |       |                        |       |
| Cash and cash equivalents                                                                                                                                                                                    |       | $                       | 91,443     |                        | $          | 81,301 |   |
| Investments maturing within one year                                                                                                                                                                         |       | 17,668                  |       | 25,864                      |       |
| Accounts receivable, less allowance for doubtful  accounts of $2,201 and $2,449 at June 29, 2007 and December 31, 2006,  respectively                                                                   |       | 110,329                 |       | 126,471                     |       |
| Other receivables                                                                                                                                                                                            |       | 11,148                  |       | 13,365                      |       |
| Inventories                                                                                                                                                                                                  |       | 32,230                  |       | 41,765                      |       |
| Other current assets                                                                                                                                                                                         |       | 5,624                   |       | 3,904                       |       |
| Deferred tax assets, net                                                                                                                                                                                     |       | 9,266                   |       | 7,355                       |       |
| Total current assets                                                                                                                                                                                         |       | 277,708                 |       | 300,025                     |       |
|                                                                                                                                                                                                         |       |                    |       |                        |       |
| Investments                                                                                                                                                                                                  |       | —                  |       | 987                         |       |
| Property and equipment, net                                                                                                                                                                                  |       | 38,018                  |       | 38,004                      |       |
| Goodwill                                                                                                                                                                                                     |       | 590,386                 |       | 607,488                     |       |
| Other intangible assets, net                                                                                                                                                                                 |       | 189,055                 |       | 209,674                     |       |
| Other assets                                                                                                                                                                                                 |       | 2,787                   |       | 2,676                       |       |
| Total assets                                                                                                                                                                                                 |       | $                       | 1,097,954  |                        | $          | 1,158,854 |   |
|                                                                                                                                                                                                         |       |                    |       |                        |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                | ** ** | ** **              | ** ** | ** **                  | ** ** |
| Current  liabilities:                                                                                                                                                                                        |       |                    |       |                        |       |
| Accounts payable                                                                                                                                                                                             |       | $                       | 14,639     |                        | $          | 16,260 |   |
| Accrued wages and commissions                                                                                                                                                                                |       | 20,826                  |       | 25,511                      |       |
| Accrued liabilities                                                                                                                                                                                          |       | 25,822                  |       | 29,754                      |       |
| Income taxes payable                                                                                                                                                                                         |       | 13,729                  |       | 17,364                      |       |
| Deferred revenue, current                                                                                                                                                                                    |       | 47,485                  |       | 44,453                      |       |
| Total current liabilities                                                                                                                                                                                    |       | 122,501                 |       | 133,342                     |       |
|                                                                                                                                                                                                         |       |                    |       |                        |       |
| Unsecured bank line of credit                                                                                                                                                                                |       | 115,000                 |       | 150,000                     |       |
| Deferred tax liabilities, net                                                                                                                                                                                |       | 9,491                   |       | 30,377                      |       |
| Deferred revenue, non-current                                                                                                                                                                                |       | 10,057                  |       | 10,070                      |       |
| Other non-current liabilities                                                                                                                                                                                |       | 532                     |       | 1,222                       |       |
| Total liabilities                                                                                                                                                                                            |       | 257,581                 |       | 325,011                     |       |
|                                                                                                                                                                                                         |       |                    |       |                        |       |
| Commitments and  contingencies*(see Notes 10 and 11)*                                                                                                                                                        |       |                    |       |                        |       |
|                                                                                                                                                                                                         |       |                    |       |                        |       |
| Stockholders’  equity:                                                                                                                                                                                  |       |                    |       |                        |       |
| Preferred stock, par value $0.001 per share; 5,000  shares authorized; no shares issued and outstanding                                                                                                      |       | —                  |       | —                      |       |
| Common stock, par value $0.001 per share; 200,000  shares authorized; June 29, 2007—53,814 shares issued and 50,847 outstanding;  December 31, 2006 — 53,382 shares issued and 50,642 outstanding; |       | 54                      |       | 53                          |       |
| Additional paid-in capital                                                                                                                                                                                   |       | 1,195,888               |       | 1,185,114                   |       |
| Accumulated other comprehensive income                                                                                                                                                                       |       | 682                     |       | 65                          |       |
| Accumulated deficit*(see Note  10)*                                                                                                                                                                          |       | (248,902                | )          | (261,971                    | )          |
| Treasury stock, at cost; June 29, 2007, 3,327  shares; December 31, 2006, 2,740 shares;                                                                                                                      |       | (107,349                | )          | (89,418                     | )          |
| Total stockholders’ equity                                                                                                                                                                              |       | 840,373                 |       | 833,843                     |       |
|                                                                                                                                                                                                         |       |                    |       |                        |       |
| Total  liabilities and stockholders’ equity                                                                                                                                                             |       | $                       | 1,097,954  |                        | $          | 1,158,854 |   |

 

See notesaccompanying these condensed consolidated financial statements.

4

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**AVOCENT CORPORATION**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

(Unaudited, inthousands)
| ** **                                                                         | ** **   | **For the six months ended** | ** **   |
|------------------------------------------------------------------------------------|--------------|--------------------------------------------------|--------------|
| ** **                                                                         | ** **   | **June 29,**                                | ** **   | **June 30,** | ** ** |
| ** **                                                                         | ** **   | **2007**                                         | ** **   | **2006** | ** ** |
| *** ***                                                                       | *** *** | *** ***                                     | *** *** | *** *** | *** *** |
| Cash flows from  operating activities:                                             | * *     | * *                                         | * *     | * * | * * |
| Net income                                                                         |         | $                                                | 15,746       |   | $ | 26,514 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |         |                                             |         |   |   |
| Depreciation                                                                       |         | 4,730                                            |         | 3,974 |   |
| Amortization of intangible assets                                                  |         | 22,208                                           |         | 7,252 |   |
| Stock-based compensation                                                           |         | 8,765                                            |         | 3,563 |   |
| Acquired in-process research and development  expenses                             |         | —                                           |         | 2,100 |   |
| Amortization of premiums (discounts) on investments                                |         | (143                                             | )            | 100 |   |
| Net loss on sales of investments                                                   |         | —                                           |         | 53 |   |
| Net loss on disposition of fixed assets                                            |         | 222                                              |         | — |   |
| Excess tax benefit from stock-based compensation                                   |         | (848                                             | )            | (3,845 | ) |
| Changes in operating assets and liabilities, net of  acquisition:                  |         |                                             |         |   |   |
| Accounts receivable, net                                                           |         | 16,113                                           |         | (387 | ) |
| Inventories, net                                                                   |         | 9,559                                            |         | (3,415 | ) |
| Other assets                                                                       |         | 499                                              |         | (3,765 | ) |
| Accounts payable                                                                   |         | (1,498                                           | )            | (5,971 | ) |
| Accrued wages and commissions                                                      |         | (4,685                                           | )            | 2,456 |   |
| Accrued other liabilities and deferred revenue                                     |         | (955                                             | )            | 5,180 |   |
| Income taxes, current and deferred                                                 |         | (12,254                                          | )            | (2,228 | ) |
| Net cash provided by operating activities                                          |         | 57,459                                           |         | 31,581 |   |
| ** **                                                                         | ** **   | ** **                                       | ** **   | ** ** | ** ** |
| Cash flows from  investing activities:                                             |         |                                             |         |   |   |
| Purchase of other intangible assets                                                |         | (3,425                                           | )            | (2,699 | ) |
| Purchase of Cyclades, net of cash received                                         |         | —                                           |         | (91,568 | ) |
| Purchases of property and equipment                                                |         | (4,868                                           | )            | (3,157 | ) |
| Purchases of investments                                                           |         | (50,681                                          | )            | (128,420 | ) |
| Maturities and proceeds from sales of investments                                  |         | 60,085                                           |         | 294,719 |   |
| Net cash provided by investing activities                                          |         | 1,111                                            |         | 68,875 |   |
| ** **                                                                         | ** **   | ** **                                       | ** **   | ** ** | ** ** |
| Cash flows from  financing activities:                                             | ** **   | ** **                                       | ** **   | ** ** | ** ** |
| Repayment of debt assumed in acquisition                                           |         | —                                           |         | (1,715 | ) |
| Borrowings (repayments) under unsecured line of  credit, net                       |         | (35,000                                          | )            | 12,005 |   |
| Payment of financing costs                                                         |         | —                                           |         | (2,005 | ) |
| Proceeds from employee stock option exercises                                      |         | 3,533                                            |         | 20,587 |   |
| Excess tax benefit from stock-based compensation                                   |         | 848                                              |         | 3,845 |   |
| Purchases of treasury stock                                                        |         | (17,931                                          | )            | (119,186 | ) |
| Net cash used in financing activities                                              |         | (48,550                                          | )            | (86,469 | ) |
|                                                                               |         |                                             |         |   |   |
| Effect of  exchange rate changes on cash and cash equivalents                      |         | 122                                              |         | 279 |   |
|                                                                               |         |                                             |         |   |   |
| Net increase in  cash and cash equivalents                                         |         | 10,142                                           |         | 14,266 |   |
| Cash and cash  equivalents at beginning of period                                  |         | 81,301                                           |         | 66,425 |   |
| Cash and cash  equivalents at end of period                                        |         | $                                                | 91,443       |   | $ | 80,691 |   |

 

See notesaccompanying these condensed consolidated financial statements.

5

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**AVOCENT CORPORATION**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED**

(Unaudited, in thousands,except per share data)

Note 1.   Basis of Presentation

The accompanyingunaudited condensed consolidated financial statements have been prepared inconformity with United States generally accepted accounting principles andreflect all adjustments consisting of normal recurring adjustments which, inthe opinion of management, are necessary for a fair statement of the resultsfor the periods shown.  The results ofoperations for these periods are not necessarily indicative of the results expectedfor the full fiscal year or for any future periods.  The preparation of financial statements inconformity with generally accepted accounting principles requires management tomake estimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenues and expensesduring the reporting period.  Actualresults could differ from those estimates and assumptions.

The accompanyingunaudited condensed consolidated financial statements should be read inconjunction with the audited consolidated financial statements and the relatednotes contained in our Annual Report on Form 10-K for the year ended December31, 2006, which is on file with the Securities and Exchange Commission and isavailable at our website, www.avocent.com. The consolidated balance sheetpresented in the accompanying condensed consolidated financial statements forDecember 31, 2006, was derived from the audited financial statements filed inour Form 10-K for the period ended December 31, 2006, but does not include alldisclosures required by accounting principles generally accepted in the UnitedStates of America.

We report ourannual results based on years ending December 31.  We report our quarterly results for the firstthree interim periods based on 13 week periods ending on Fridays and for thefourth interim period ending on December 31.

Our financialstatements are consolidated and include the accounts of Avocent Corporation andour wholly owned subsidiaries.  Allsignificant inter-company transactions and balances have been eliminated inconsolidation.

Note 2.   Inventories

Inventories consisted of the following at:
|                 | ** ** | **June 29, 2007** | ** ** | **December 31, 2006** | ** ** |
|-----------------|------------|-----------------------------|------------|---------------------------------|------------|
| ** **      | ** ** | ** **                  | ** ** | ** **                      | ** ** |
| Raw materials   |       | $                           | 2,655      |                            | $          | 3,022 |   |
| Work-in-process |       | 1,632                       |       | 1,411                           |       |
| Finished goods  |       | 27,943                      |       | 37,332                          |       |
| Inventories     |       | $                           | 32,230     |                            | $          | 41,765 |   |

 

Inventories above have beenreduced by reserves for excess and obsolete inventories of $7,058 and $5,578 asof June 29, 2007 and December 31, 2006, respectively.

Note 3.   Equity and Treasury Stock

Stock option exercises and restricted stock unit (RSU)vesting — Shares of our common stock issued as a result of option exercisestotaled 50 shares during the quarter ended June 29, 2007 and 72 shares duringthe quarter ended June 30, 2006.  Sharesof our common stock issued as a result of option exercises totaled 186 sharesduring the six months ended June 29, 2007 and 987 shares during the six monthsended June 30, 2006.

During the quarter June 29, 2007, a total of 19 restricted stock unitsvested.  At the release of these shares,7 shares were withheld for taxes and considered immediately retired, resultingin issuance of 12 shares, net of tax withholding.  During the six months ended June 29, 2007, a total of 349 restricted stock unitsvested.  At the release of these shares,104 shares were withheld for taxes, resulting in issuance of 245 shares, net oftax withholding.  There was no suchvesting during the three and six months ended June 30, 2006. During thesecond quarter of 2007 our Compensation Committee approved the grant of 1,075time-based and 399 performance-based restricted stock units to our officers,directors and other employees.

6

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(1)          Stock repurchases — Werepurchased 100 shares of our common stock during the quarter ended June 29,2007 at a cost totaling $2,493. We repurchased 587 shares of our common stockduring the six months ended June 29, 2007 at a cost totaling $17,931.  We repurchased 3,963 shares of our common stockduring the quarter ended June 30, 2006 at a cost totaling $95,303.  We repurchased 4,788 shares of our commonstock during the six months ended June 30, 2006 at a cost totaling $122,255.  We repurchased 122 shares of our common stockat a cost of $3,069 at the end of the second quarter of 2006.  The transaction settled at the beginning ofour third quarter of 2006.

These treasury shares were purchased on the openmarket through various brokers under the stock re-purchase plan approved by ourBoard of Directors.  Our Board hasapproved a total of 12,000 shares for repurchase under the program.  As of June 29, 2007 we may repurchase anadditional 1,600 shares under this program.

Note 4.   Accumulated Other Comprehensive Income (Loss)

Werecord unrealized gains and losses on our foreign currency translationadjustments, unrealized gains and losses on derivatives which are cash flowhedges, and unrealized holding gains or losses on our available-for-salesecurities, net of tax, as as a separate component of stockholders’ equity asaccumulated other comprehensive income (loss). Comprehensive income in the first six months of 2007 of $16,364 consistsof $15,746 of net income, $190 of unrealized gains on investments (net ofdeferred income taxes) and $355 of unrealized gains on the cash flow hedge (netof deferred income taxes) and $73 of foreign currency translationadjustments.  Comprehensive income in thefirst six months of 2006 of $26,926 consists of $26,514 of net income, $133 ofunrealized gains on investments (net of deferred income taxes) and $279 offoreign currency translation adjustments. As of June 29, 2007 and December 31, 2006, total accumulated othercomprehensive income was $682 and $65, respectively.

Note 5.   Earnings Per Share
| ** **                                                           | ** ** | **Income (Numerator)** | ** ** | **Shares   (Denominator)** | ** ** | **Per-Share   Amount** | ** ** |
|----------------------------------------------------------------------|------------|-----------------------------|------------|---------------------------------|------------|-----------------------------|------------|
| ** **                                                           | ** ** | ** **                  | ** ** | ** **                      | ** ** | ** **                  | ** ** |
| **For the  three months ended June 29, 2007**                        |       |                        |       |                            |       |                        |       |
| **Basic EPS**                                                        |       |                        |       |                            |       |                        |       |
| Net income available to common stockholders                          |       | $                           | 15,000     |                            | 50,476     |                        | $          | 0.30 |   |
| **Effect of Dilutive Securities**                                    |       |                        |       |                            |       |                        |       |
| Stock options and unvested restricted stock awards                   |       | —                      |       | 682                             |       | —                      |       |
| **Diluted EPS**                                                      |       |                        |       |                            |       |                        |       |
| Net income available to common stockholders and  assumed conversions |       | $                           | 15,000     |                            | 51,158     |                        | $          | 0.29 |   |
|                                                                 |       |                        |       |                            |       |                        |       |
| **For the  three months ended June 30, 2006**                        |       |                        |       |                            |       |                        |       |
| **Basic EPS**                                                        |       |                        |       |                            |       |                        |       |
| Net income available to common stockholders                          |       | $                           | 13,581     |                            | 47,943     |                        | $          | 0.28 |   |
| **Effect of Dilutive Securities**                                    |       |                        |       |                            |       |                        |       |
| Stock options and unvested restricted stock awards                   |       | —                      |       | 766                             |       | —                      |       |
| **Diluted EPS**                                                      |       |                        |       |                            |       |                        |       |
| Net income available to common stockholders and  assumed conversions |       | $                           | 13,581     |                            | 48,709     |                        | $          | 0.28 |   |
| ** **                                                           | ** ** | ** **                  | ** ** | ** **                      | ** ** | ** **                  | ** ** |
| **For the  six months ended June 29, 2007**                          |       |                        |       |                            |       |                        |       |
| **Basic EPS**                                                        |       |                        |       |                            |       |                        |       |
| Net income available to common stockholders                          |       | $                           | 15,746     |                            | 50,607     |                        | $          | 0.31 |   |
| **Effect of Dilutive Securities**                                    |       |                        |       |                            |       |                        |       |
| Stock options and unvested restricted stock awards                   |       | —                      |       | 850                             |       | —                      |       |
| **Diluted EPS**                                                      |       |                        |       |                            |       |                        |       |
| Net income available to common stockholders and  assumed conversions |       | $                           | 15,746     |                            | 51,457     |                        | $          | 0.31 |   |
| ** **                                                           |       |                        |       |                            |       |                        |       |
| **For the  six months ended June 30, 2006**                          |       |                        |       |                            |       |                        |       |
| **Basic EPS**                                                        |       |                        |       |                            |       |                        |       |
| Net income available to common stockholders                          |       | $                           | 26,514     |                            | 48,515     |                        | $          | 0.55 |   |
| **Effect of Dilutive Securities**                                    |       |                        |       |                            |       |                        |       |
| Stock options and unvested restricted stock awards                   |       | —                      |       | 821                             |       | —                      |       |
| **Diluted EPS**                                                      |       |                        |       |                            |       |                        |       |
| Net income  available to common stockholders and assumed conversions |       | $                           | 26,514     |                            | 49,336     |                        | $          | 0.54 |   |

 

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Anti-dilutive options to purchase commonstock outstanding were excluded from the calculations above. Anti-dilutiveoptions totaled 2,203 and 2,207 for the three and six months ended June 29,2007, respectively. Anti-dilutive options totaled 2,382 and 2,381 for the threeand six months ended June 30, 2006, respectively.

Note 6.   Segment Reporting

We evaluate the performance of our segments based onrevenue and operating profit, which is calculated before corporate andunallocated costs, amortization of intangibles and other purchase accountingadjustments, acquired in-process research and development expense, andstock-based compensation costs.  We donot track or use assets by segment as a measure of performance; therefore, wehave not presented assets by segment. The following is a reconciliation of information for our reportablesegments to our consolidated results:
|                                                                    | ** ** | **For the three months ended** | ** ** | **For the six months ended** | ** ** |
|--------------------------------------------------------------------|------------|----------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                         | ** ** | **June 29,  2007**                            | ** ** | **June 30,  2006**                          | ** ** | **June 29,  2007** | ** ** | **June 30,  2006** | ** ** |
| Net revenue:                                                       |       |                                               |       |                                             |       |   |   |   |   |
| Management Systems                                                 |       | $                                                  | 114,964    |                                             | 111,823    |   | $ | 220,068 |   | $ | 202,321 |   |
| LANDesk                                                            |       | 27,563                                             |       | —                                           |       | 51,417 |   | — |   |
| Other business units                                               |       | 6,035                                              |       | 5,251                                            |       | 10,259 |   | 8,272 |   |
| Corporate and unallocated                                          |       | 2,158                                              |       | 931                                              |       | 2,908 |   | 1,924 |   |
| Amortization of fair value adjustment to LANDesk  deferred revenue |       | (495                                               | )          | —                                           |       | (1,276 | ) | — |   |
| Total net revenue                                                  |       | $                                                  | 150,225    |                                             | $          | 118,005 |   | $ | 283,376 |   | $ | 212,517 |   |
|                                                                    |            |                                                    |            |                                                  |            |  |  |  |  |  |  |  |  |

 
|                                                                    | ** ** | **For the three months ended** | ** ** | **For the six months ended** | ** ** |
|--------------------------------------------------------------------|------------|----------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                         | ** ** | **June 29,  2007**                            | ** ** | **June 30,  2006**                          | ** ** | **June 29,  2007** | ** ** | **June 30,  2006** | ** ** |
| Operating income  (loss):                                          | ** ** | ** **                                         | ** ** | ** **                                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Management Systems                                                 |       | $                                                  | 34,588     |                                             | $          | 30,009 |   | $ | 60,499 |   | $ | 55,792 |   |
| LANDesk                                                            |       | 1,117                                              |       | —                                           |       | 84 |   | — |   |
| Other business units                                               |       | (2,073                                             | )          | (2,453                                           | )          | (5,222 | ) | (5,152 | ) |
| Corporate and unallocated costs                                    |       | (3,804                                             | )          | (2,580                                           | )          | (6,922 | ) | (5,309 | ) |
| Amortization of fair value adjustment to LANDesk  deferred revenue |       | (495                                               | )          |                                             |       | (1,276 | ) |   |   |
| Amortization of intangibles and other expenses                     |       | (10,360                                            | )          | (5,053                                           | )          | (22,017 | ) | (7,554 | ) |
| Stock-based compensation expense                                   |       | (5,103                                             | )          | (2,722                                           | )          | (8,764 | ) | (3,563 | ) |
| Acquired in-process research and development expense               |       | —                                             |       | —                                           |       | — |   | (2,100 | ) |
| Total income  from operations                                      |       | $                                                  | 13,870     |                                             | $          | 17,201 |   | $ | 16,382 |   | $ | 32,114 |   |
|                                                               |       |                                               |       |                                             |       |   |   |   |   |
| Other income (expense)                                             |       | (1,349                                             | )          | 1,779                                            |       | (3,021 | ) | 4,795 |   |
| Income before provision  for income taxes                          |       | 12,521                                             |       | 18,980                                           |       | 13,361 |   | 36,909 |   |

 

**Revenueand operating income for our Management Systems Division includes the operatingresults of Cyclades from**

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the date of the acquisition on March 30, 2006. LANDeskrevenue and operating income includes the operating results from the date ofthe acquisition on August 31, 2006.

Sales by product line for our Management SystemsDivision and LANDesk Division for the three months and six months ended June29, 2007 and June 30, 2006 are as follows:
|                                        | ** ** | **For the three months ended** | ** ** | **For the six months ended** | ** ** |
|----------------------------------------|------------|----------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                             | ** ** | **June 29,  2007**                            | ** ** | **June 30,  2006**                          | ** ** | **June 29,  2007** | ** ** | **June 30,  2006** | ** ** |
| Management  Systems net revenue:       |       |                                               |       |                                             |       |   |   |   |   |
| KVM                                    |       | $                                                  | 87,459     |                                             | $          | 83,496 |   | $ | 168,147 |   | $ | 161,471 |   |
| Serial Management                      |       | 12,752                                             |       | 13,817                                           |       | 24,038 |   | 14,810 |   |
| Embedded software and solutions        |       | 7,897                                              |       | 8,828                                            |       | 15,474 |   | 14,961 |   |
| Other                                  |       | 6,856                                              |       | 5,682                                            |       | 12,409 |   | 11,079 |   |
| Total Management  Systems net revenue: |       | $                                                  | 114,964    |                                             | $          | 111,823 |   | $ | 220,068 |   | $ | 202,321 |   |

 
|                                | ** ** | **For the Three   Months Ended** | ** ** | **For the Six Months   Ended** | ** ** |
|--------------------------------|------------|------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                     | ** ** | **June 29, 2007**                          | ** ** | **June 29, 2007**                        | ** ** |
| LANDesk Division  net revenue: |       |                                                 |       |                                               |       |
| Licenses and royalties         |       | $                                                    | 16,800     |                                               | $          | 30,171 |   |
| Maintenance and services       |       | 10,763                                               |       | 21,246                                             |       |
| Total LANDesk  net revenue     |       | $                                                    | 27,563     |                                               | $          | 51,417 |   |

 

We sell our products internationally to customers inseveral countries; however no foreign country accounted for more than 10% ofsales in the second quarter or first six months of 2007 or 2006.

**Asof June 29, 2007, long-lived assets totaled $38,018, which includes $26,457held in the United States and $11,561 held outside of the U.S.  As of December 31, 2006, long-lived assetstotaled $38,004, which includes $25,585 held in the United States and $12,419held outside of the United States.**

**Note 7.   Forward Contracts and Interest Rate Swap**

We use forward contracts to reduce our foreign currencyexposure related to the net cash flows from our international operations.  The majority of these contracts areshort-term contracts (three months or less) and are marked-to-market eachquarter and included in trade payables, with the offsetting gain or lossincluded in other income (expense) in the accompanying consolidated statementsof income.  As of June 29, 2007, we hadfour open forward contracts with an approximate fair value of $(5).  As of December 31, 2006, we had one open forwardcontract with an approximate fair value of zero.

In 2006, we entered into an interest rate swapagreement with an original notional amount of $125,000. The objective of therate swap agreement is to provide a hedge against rising LIBOR interest rates thatwould have a negative effect on our cash flows due to changes in interest rateson the line of credit.  The swap was effective on August 31, 2006 andterminates on December 31, 2008.  The swap calls for us to make fixed ratepayments of 5.42% over the term of the hedge and to receive floating ratepayments based on LIBOR (matching the LIBOR rate in the line of credit above)from the counter-party. We anticipate that the hedge will be settled uponmaturity and it is being accounted for as a cash flow hedge. The interest rateswap is recorded at fair value each reporting period with the changes in thefair value of the hedge that take place through the date of maturity recordedin accumulated other comprehensive income (OCI).

At June 29, 2007, we recorded an unrealized loss onthe swap, net of tax, of $101 in accumulated OCI. There was no ineffectivenessin the year and we anticipate no reclassification of OCI into earnings in thenext 12 months.  The notional amount ofthe swap as of June 29, 2007 is $110,000.

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**Note 8.   Goodwill and Other Intangible Assets**

**Other intangible assets subject to amortization wereas follows:**

|                                           | ** ** | **June 29, 2007**  | ** ** | **December 31, 2006** | ** ** |
|-------------------------------------------|------------|------------------------------|------------|---------------------------------|------------|
| ** **                                | ** ** | **Gross  Carrying  Amounts** | ** ** | **Accumulated  Amortization**   | ** ** | **Gross  Carrying  Amounts** | ** ** | **Accumulated  Amortization** | ** ** |
|                                      |       |                         |       |                            |       |   |   |   |   |
| Developed  technology                     |       | $                            | 69,740     |                            | $          | 24,440 |   | $ | 68,720 |   | $ | 17,741 |   |
| Internally  developed software for resale |       | 21,900                       |       | 3,042                           |       | 21,900 |   | 1,217 |   |
| Patents and  trademarks                   |       | 36,012                       |       | 10,109                          |       | 35,520 |   | 7,753 |   |
| Customer base  and certifications         |       | 100,198                      |       | 17,504                          |       | 100,120 |   | 9,449 |   |
| Maintenance  contracts                    |       | 9,600                        |       | 1,600                           |       | 9,600 |   | 640 |   |
| Non-compete  agreements                   |       | 12,720                       |       | 5,704                           |       | 12,720 |   | 3,775 |   |
| Other                                     |       | 4,228                        |       | 2,944                           |       | 4,228 |   | 2,559 |   |
|                                      |       | $                            | 254,398    |                            | $          | 65,343 |   | $ | 252,808 |   | $ | 43,134 |   |

 

**During the first quarter of 2007, we acquired anexisting product line and related technology from a third party forapproximately $1,020 in cash, which we recorded in intangible assets.  The amounts are subject to futureamortization over an estimated three year life. **Additionally, thepurchase agreement provides for certain potential incentive payments ofapproximately $600.  These potentialincentive costs will be recognized as expense over the periods for which therelated services are provided.

**Amortization expense for other intangible assets forthe three months ended June 29, 2007 and June 30, 2006, was $10,348 and $4,901,respectively.  Amortization expense forother intangible assets for the six months ended June 29, 2007 and June 30, 2006,was $21,993 and $7,252, respectively. The approximate estimated annual amortization for other intangibles isas follows:**

| Years ending December 31: | ** ** | ** ** | ** ** |
|------------------------------------------|------------|------------|------------|
| 2007, remaining                          |       | $          | 22,170     |   |
| 2008                                     |       | $          | 42,097     |   |
| 2009                                     |       | $          | 37,507     |   |
| 2010                                     |       | $          | 34,499     |   |
| 2011                                     |       | $          | 26,034     |   |
| Thereafter                               |       | $          | 26,748     |   |

 

**As a result of the merger of certain divisions there werereallocations of the carrying amount of goodwill among the divisions during thefirst quarter of 2007.  Additionally, asa result of making certain tax elections during the second quarter of 2007, weadjusted the carrying amount of goodwill for the LANDesk division (*see Note 10*).  Asummary of changes in goodwill for the six months ended June 29, 2007, is asfollows:**
| ** **                         | ** ** | ** **     | ** ** | ** **   | ** ** | **Embedded**          | ** ** | ** **   | ** ** | ** ** | ** ** |
|------------------------------------|------------|----------------|------------|--------------|------------|-----------------------|------------|--------------|------------|------------|------------|
| ** **                         | ** ** | **Management** | ** ** | ** **   | ** ** | **Software and** | ** ** | **Other**    | ** ** | ** ** | ** ** |
| ** **                         | ** ** | **Systems**    | ** ** | **LANDesk**  | ** ** | **Solutions**         | ** ** | **Business** | ** ** | ** ** | ** ** |
| ** **                         | ** ** | **Division**   | ** ** | **Division** | ** ** | **Divisions**         | ** ** | **Units**    | ** ** | **Total**  | ** ** |
|                               |       |           |       |         |       |                  |       |         |       |       |       |
| Balance as of  December 31, 2006   |       | $              | 316,430    |         | $          | 274,613               |       | $            | 11,862     |       | $          | 4,583 |   | $ | 607,488 |   |
|                               |       |           |       |         |       |                  |       |         |       |       |       |
| Reallocation  from segment changes |       | 11,862         |       |         |       | (11,862               | )          |         |       | —     |       |
|                               |       |           |       |         |       |                  |       |         |       |       |       |
| Adjustments  during the six months |       |           |       | (17,102      | )          |                  |       |         |       | (17,102    | )          |
|                               |       |           |       |         |       |                  |       |         |       |       |       |
| Balance as of June 29,  2007       |       | $              | 328,292    |         | $          | 257,511               |       | $            | —     |       | $          | 4,583 |   | $ | 590,386 |   |

 

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Note 9.  Product Warranties and Deferred Revenue

The activitywithin the liability for warranty returns for the six months ended June 29,2007 is as follows:
|                                                           | ** ** | **2007** | ** ** |
|-----------------------------------------------------------|------------|----------|------------|
|                                                      |       |     |       |
| Balance, January  1, 2007                                 |       | $        | 2,486      |   |
|                                                      |       |     |       |
| Accruals for  product warranties issued during the period |       | 2,480    |       |
|                                                      |       |     |       |
| Settlements made  during the period                       |       | (2,913   | )          |
|                                                      |       |     |       |
| Balance, June 29, 2007                                    |       | $        | 2,053      |   |

 

Deferred revenue related to our extended warranty forhardware products program was $4,514 at June 29, 2007 and $4,545 at December31, 2006.  We recorded earned revenuefrom the amortization of deferred revenue related to extended warranties of$2,015 during the six months ended June 29, 2007.  In addition, we recorded deferred revenuerelated to new extended warranties of $1,984 during the six months ended June29, 2007.

We defer revenue for subscription, service andmaintenance contracts until earned, which is generally over the term of thecontract or when services are performed. As of June 29, 2007, deferred revenuewas $57,542, of which approximately $51,540 related to LANDesk.  As of December 31, 2006, deferred revenue was$53,514, of which approximately $47,858 related to LANDesk.

Note 10. Income taxes

During the second quarter of 2007, we made certainelections under the Internal Revenue Code Sec. 338(g) related to the LANDeskacquisition in August 2006.  As a resultof making these elections, the acquisition will now be treated for U.S. taxpurposes as an asset acquisition where we step up the tax basis in assets andliabilities previously recognized in the purchase accounting.  We previously accounted for this acquisitionas a qualified stock purchase, with carryover tax basis in the assets andliabilities recorded.  Our preliminarypurchase price allocation was based upon the initial structure of thetransaction and did not take into consideration the tax impacts should theseelections be made within the required time period, including the tax impactsassociated with the amount assigned to in-process R&D that was charged toexpense at acquisition.  During thesecond quarter of 2007, we reconsidered the measurement of deferred taxesrelated to this business combination to take into consideration the tax impactsof the elections made.  As a result, weadjusted the deferred tax accounts with the offset reducing the amount ofgoodwill previously recognized from this transaction.  In addition, we recognized a tax benefit of$6,500 during the quarter ended June 29, 2007 to take into consideration thetax impacts associated with the in-process R&D previously charged toexpense on a gross basis at acquisition. We have indemnified former LANDesk shareholders for any personal taxconsequences should this election create current tax obligations for theseformer shareholders.

As a result of these taxelections, the effective tax rate in the first six months of 2007 wasapproximately (17.8)%, compared to an effective tax rate of approximately 28.2%in the first six months of 2006.  The provision for income taxes was abenefit of ($2,385) for the first six months of 2007, compared to incometax expense of $10,395 for the first six months of 2006.

We adopted FASB Interpretation No. 48, “Accounting forUncertainty in Income Taxes, an interpretation of FASB Statement No. 109” onJanuary 1, 2007. As a result of adopting this FASB Interpretation, we recordedan increase to reserves for uncertain tax positions of $2,900.  Thisincrease was recorded as an increase to the January 1, 2007 accumulated deficitbalance.  As of June 29, 2007 we had total reserves for uncertain taxpositions related to gross unrecognized tax benefits of $11,717 of which$9,617, if recognized, would affect the effective tax rate.  We recognizepotential accrued interest and penalties related to unrecognized tax benefitsfrom our global operations within income tax expense. As of June 29, 2007, wehad accrued interest expense related to the unrecognized tax benefits of$2,728.

We conduct business globally, and as a result oursubsidiaries file income tax returns in the U.S. federal jurisdiction 

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and various state and foreign jurisdictions.  In the normal courseof business we are subject to examinations by taxing authorities throughout theworld including the U.S.  With few exceptions, we are no longer subject toU.S. federal, state, and local, or non-U.S. income tax examinations before2003.

We are currently under audit by the Internal RevenueService for the 2004 and 2005 tax years.  It is possible that theexamination phase of the audit for those years will conclude in 2007, and it ispossible a change in the unrecognized tax benefits may occur; however,quantification of an estimated range cannot be made at this time.

Note 11.  Litigation

In March 2006, TFS Electronic Manufacturing Services,Inc. (“TFS”) filed a Third-Party Complaint and an Objection to Claim of AvocentCorporation with the United States Bankruptcy Court, District of Arizona.  As a result of the complaint,an adversary proceeding has been commenced against us in the TFSbankruptcy case in an effort to disallow our claim in its entirety.  TFS also seeks damages in an undeterminedamount for our alleged breach of contract, negligence, negligentmisrepresentations, breaches of warranty, unjust enrichment, disparagement ofTFS’ business, and quantum merit.  TFS isseeking recovery of actual damages, punitive damages, attorneys’ fees, pre- andpost-judgment interest, costs, and the imposition of joint and severalliability as to us and a named co-defendant, TopSearch Printed Circuits (HK),Ltd.  (“TopSearch”).  The matter has been consolidated with aseparate matter between TFS and TopSearch pending in the United States DistrictCourt for the District of Arizona, for purposes of discovery through pre-trial.The court has ordered that early mediation be scheduled and a mediator has beenassigned.  Discovery is underway. We intend to vigorously defend our positions.

In January 2007, we filed a complaint for patentinfringement in the United States District Court for the Western District ofWashington against Aten Technology, Inc., Aten International Co., Ltd, BelkinCorporation, Rose Electronics and its general partners, and TrippeManufacturing Company.  The defendantshave filed counterclaims alleging non-infringement, unenforceability, and invalidity,and discovery is currently underway.  InMay 2007, we entered into a Settlement and License Agreement with TrippeManufacturing, and dismissed Trippe from the lawsuit.

In March 2007, KBM Enterprises, formerly acontract manufacturer for Avocent, filed a complaint against Avocent inthe Circuit Court of Madison County, Alabama, seeking $9.5 millionfor costs allegedly incurred by KBM in its manufacturing efforts on behalfof Avocent.  We have filed an answer andcounterclaims against KBM and one of its principals, and we intend tovigorously defend our positions. Discovery is currently under way.

In April 2007, we filed a complaint for declaratoryjudgment against Aten International Co., Ltd. in the United States DistrictCourt for the Northern District of Alabama. We are seeking a declaratory judgment that two patents owned by Aten andasserted against Avocent are invalid and that certain of products alleged byAten to infringe do not infringe these patents.

**Note 12. Subsequent Events**

Duringthe period from June 30, 2007 through August 1, 2007, we purchased 200additional shares of our common stock under our share repurchase program for atotal cost of $5,822.

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**Item2.  Management’s Discussion and Analysisof Financial Condition and Results of Operations.**

*THE INFORMATION IN THIS ITEM 2**“MANAGEMENT’S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS”**CONTAINS FORWARD-LOOKINGSTATEMENTS, INCLUDING, WITHOUT LIMITATION, STATEMENTS RELATING TO OUR FUTUREBUSINESS PROSPECTS AND ECONOMIC CONDITIONS IN GENERAL; STATEMENTS REGARDING OURABILITY TO PREDICT FUTURE SALES AND MANAGE INVENTORY LEVELS; STATEMENTSREGARDING PRICING PRESSURE; STATEMENTS REGARDING THE FLUCTUATION OF OUR REVENUEGROWTH IN RELATION TO ECONOMIC CONDITIONS AND IT CAPITAL SPENDING TRENDS;STATEMENTS REGARDING OUR PRODUCT PLATFORMS AND OUR  ABILITY TO RESUME GROWTH IN OUR OVERALLBUSINESS; STATEMENTS REGARDING INCREASED SALES OF OUR DIGITAL PRODUCTS ANDEMBEDDED SOLUTIONS AND THEIR ABILITY TO OFFSET PRICE DECLINES AND COMPETITIVEFACTORS; STATEMENTS ABOUT THE REPAYMENT OF OUR BANK LINE OF CREDIT; STATEMENTSREGARDING OUR REVENUE, GROSS MARGINS, OUR RESEARCH AND DEVELOPMENT EXPENSES,OUR SELLING, GENERAL AND ADMINISTRATIVE EXPENSES, AMORTIZATION EXPENSES, ANDSTOCK-BASED COMPENSATION EXPENSES IN THE SECOND HALF OF 2007; AND STATEMENTSREGARDING OUR LEGAL COSTS FOR PATENT AND OTHER LITIGATION MATTERS.  THESE FORWARD-LOOKING STATEMENTS ARE SUBJECTTO CERTAIN RISKS AND UNCERTAINTIES THAT COULD CAUSE OUR ACTUAL RESULTS TODIFFER MATERIALLY FROM THOSE ANTICIPATED IN THE FORWARD-LOOKINGSTATEMENTS.  FACTORS THAT MIGHT CAUSESUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN PART II,ITEM 1A “RISK FACTORS.”*

**Overview**

Avocent Corporation designs, manufactures, licenses, and sells softwareand hardware products and technologies that provide connectivity andcentralized management of information technology (IT) infrastructure.  We (meaning Avocent and its wholly-ownedsubsidiaries) provide connectivity and systems management products andtechnologies that centralize control of servers, desktop computers, serialdevices, wireless devices, mobile devices, and network appliances, thusincreasing the efficiency of IT personnel. Server manufacturers resell private-labeled Avocent KVM (keyboard,video, and mouse) switches and embedded software and hardware technology intheir systems, and companies large and small depend on our software andhardware products and technologies for managing their growing ITinfrastructure.

For a morecomplete description of our products, technologies and markets, please refer toour Form 10-K, which was filed on March 1, 2007.

A substantialportion of our revenue is derived from sales to major server OEMs who purchaseour switching systems on a private-label or branded basis for integration andsale with their own products, sales through our reseller and distributornetwork, and sales to a limited number of direct customers. Sales to our brandedcustomers accounted for 65% of sales in the first six months of 2007 and 56% ofsales in the first six months of 2006. Sales to our OEM customers accounted for 35% of sales in the first sixmonths of 2007 and 44% of sales in the first six months of 2006.  We do not have contracts with many of ourbranded customers, and in general, our OEM and branded business customers areobligated to purchase products from us only pursuant to binding purchaseorders.  The loss of, or material declinein orders from, these customers would have a material adverse effect on ourbusiness, financial condition, results of operations, and cash flows.  Our top five customers include both OEM andbranded customers, and accounted for 53% and 60% of sales in the first six monthsof 2007 and 2006, respectively.

We sell productsto resellers, distributors, end-users, and OEMs in the United States, Canada,Europe, and Asia as well as in other foreign markets.  Sales within the United States accounted forapproximately 57% of sales in the first six months of 2007 and 56% of sales inthe first six months of 2006.  Salesoutside of the United States accounted for 43% of sales in the first six monthsof 2007 and 44% of sales in the first six months of 2006.  No foreign country accounted for more than10% of sales in the first six months of 2007 or 2006.

With continuedindustry-wide initiatives to reduce all channel inventories and to shorten leadtimes, generally trends with our major customers are to reduce the number ofweeks of forward-committed firm orders. This trend continues to affect our business with certain distributors,OEMs, and other server manufacturers, and we believe that it will continueto make our future sales more difficult to predict and inventory levels moredifficult to manage.

Wecontinue to experience significant price competition in the market for all ofour products, and we expect that pricing pressures will continue in thefuture.  In addition, general economicconditions are not predictable and we expect our revenue growth rate tofluctuate in relation to economic conditions and IT related spending trends.

**Many of our executive officers anddirectors are vested in significant amounts of options to purchase shares ofour common stock and restricted stock units (RSUs).  These officers and directors have informed usthat they have sold, and may continue to sell, shares of our common stock toprovide liquidity and diversify their portfolios.  During the second quarter of 2007 our Boardof Directors granted both time-based and performance-based RSUs with two andthree year vesting.**

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**Our largest division, theManagement Systems Division comprised 78% of our consolidated net revenue inthe first six months of 2007 and 95% in 2006. Our LANDesk Division contributed 18% of net revenue to the first sixmonths of 2007.  Our other divisions andunallocated revenue comprised the remaining 4% of our consolidated net revenuein 2007 and 5% of our consolidated net revenue in the first six months2006.  See Note 6 in the notes to thecondensed c**onsolidated financial statementscontained in Part I, Item 1 of this document.

**Results of Operations**

The following table sets forth,for the periods indicated, selected statement of income data expressed as apercentage of net sales:
|                                                        | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                             | ** ** | **June 29,  2007**          | ** ** | **June 30,  2006**        | ** ** | **June 29,  2007** | ** ** | **June 30,  2006** | ** ** |
| Net sales                                              |       | 100.0                            | %          | 100.0                          | %          | 100.0 | % | 100.0 | % |
| Cost of sales                                          |       | 36.7                             |       | 39.5                           |       | 37.9 |   | 40.1 |   |
| Gross profit                                           |       | 63.3                             |       | 60.5                           |       | 62.1 |   | 59.9 |   |
| Operating expenses:                                    |       |                             |       |                           |       |   |   |   |   |
| Research and  development expenses                     |       | 14.1                             |       | 12.1                           |       | 14.8 |   | 13.0 |   |
| Acquired  in-process research and development expenses |       | —                           |       | —                         |       | — |   | 1.0 |   |
| Selling, general  and administrative expenses          |       | 34.9                             |       | 27.7                           |       | 35.7 |   | 26.4 |   |
| Cyclades  integration expenses                         |       | —                           |       | 1.9                            |       | — |   | 1.0 |   |
| Amortization of  intangible assets                     |       | 5.1                              |       | 4.2                            |       | 5.8 |   | 3.4 |   |
| Total operating expenses                               |       | 54.1                             |       | 45.9                           |       | 56.3 |   | 44.8 |   |
|                                                   |       |                             |       |                           |       |   |   |   |   |
| Income from operations                                 |       | 9.3                              |       | 14.6                           |       | 5.8 |   | 15.1 |   |
|                                                   |       |                             |       |                           |       |   |   |   |   |
| Net investment  income                                 |       | 0.6                              |       | 1.8                            |       | 0.6 |   | 2.4 |   |
| Net realized  investment losses                        |       | —                           |       | —                         |       | — |   | — |   |
| Interest expense                                       |       | (1.5                             | )          | (.01                           | )          | (1.6 | ) | — |   |
| Other income  (expense), net                           |       | —                           |       | (0.2                           | )          | (0.1 | ) | (0.1 | ) |
| Income before provision (benefit) for income taxes     |       | 8.3                              |       | 16.1                           |       | 4.7 |   | 17.4 |   |
| Provision  (benefit) for income taxes                  |       | (1.7                             | )          | 4.6                            |       | (0.9 | ) | 4.9 |   |
| Net income                                             |       | 10.0                             | %          | 11.5                           | %          | 5.6 | % | 12.5 | % |

 

*Net sales.*  Net sales increased 27% to $150.2 million forthe second quarter of 2007 from $118.0 million for the second quarter of2006.  The increase in sales resultedprimarily from the contribution of $27.1 million in revenue from our LANDeskacquisition, completed on August 31, 2006. Branded sales increased 40% from $70.6 million in the second quarter of2006 to $98.7 million in the second quarter of 2007.  As a percentage of sales, branded revenueaccounted for 66% of sales in the second quarter of 2007 and 60% of revenue inthe second quarter of 2006.  OEM salesgrew 9% from $47.4 million in the second quarter of 2006 to $51.5 million inthe second quarter of 2007.  OEM sales were 34% of sales for the second quarterof 2007, compared to 40% of sales for the second quarter of 2006.  Sales of our digital products were $70.4million in the second quarter of 2007 compared to $69.7 million in the secondquarter of 2006.  Although revenue fromsales of digital products increased in dollars, as a percentage of sales ourdigital products represented 47% of our revenue in the second quarter of 2007compared to 59% of our revenue in the second quarter of 2006.  This decline in the percentage of revenuegenerated by sales from our digital products is a result of the diversificationof our business that the LANDesk acquisition provided.

Sales in the second quarter of 2007 increased 31% withinthe United States and 22% internationally compared to sales in the secondquarter of 2006 primarily due to the additional revenue resulting from ouracquisition of LANDesk. LANDesk’s revenue comprised $14.9 million of revenue inthe United States and $12.2 million of international revenue.  Total sales within the United States were$88.3 million and $67.3 million in the second quarter of 2007 and 2006respectively.  International sales were$61.9 million and $50.7 million in the second quarter of 2007 and 2006,respectively.  Sales within the UnitedStates were 59% of sales in the second quarter of 2007 and 57% of sales in thesecond quarter of 2006.  Internationalsales were 41% of sales in the second quarter of 2007 and 43% of sales in thesecond quarter of 2006.

Net salesincreased 33% to $283.4 million for the first six months of 2007 from $212.5million for the first six months of 2006. The increase is primarily a result of the added revenue from theacquisitions of Cyclades in the first quarter of 2006 and LANDesk in the thirdquarter of 2006.  Sales within the UnitedStates increased by approximately 35% to $162.1 million in the first six monthsof 2007 compared to domestic sales of $119.7 million in the first six months of2006.  International sales increased approximately 31% to $121.3million in the first six months of 2007 compared to international sales of  $92.8 million in the first six months of2006.  Additionally, sales to our brandedcustomers increased 55% to $183.8 million in the first six months of 2007 from$118.6 

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inthe first six months of 2006, while sales to our OEM customers increased 6% to$99.6 million in the first six months of 2007 from $93.9 in the first sixmonths of 2006.

From a divisional perspective, revenues from ourManagement Systems Division increased from $111.8 million in the second quarterof 2006 to $115.0 million in the second quarter of 2007, primarily due to thegrowth in our traditional KVM business. Our Management Systems Division is comprised of our traditional KVMproducts, our serial products, and our embedded software and solutions products.  Revenue from the Management Systems Divisionaccounted for 77% of our revenue in the second quarter of 2007 and 95% of ourrevenue in the second quarter of 2006. This decline in the Management System’s percentage of revenue is aresult of the diversification of our business, primarily as a result of theaddition of LANDesk, which accounted for 18% of our revenue in the secondquarter of 2007.  Our serial managementbusiness includes revenue from Cyclades, acquired March 30, 2006.  Sales by product line for ourManagement Systems Division for the three and six month periods ended June 29,2007 and June 30, 2006 are as follows:
|                                        | ** ** | **For the three months ended** | ** ** | **For the six months ended** | ** ** |
|----------------------------------------|------------|----------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                             | ** ** | **June 29,  2007**                            | ** ** | **June 30,  2006**                          | ** ** | **June 29,  2007** | ** ** | **June 30,  2006** | ** ** |
| Management  Systems net revenue:       |       |                                               |       |                                             |       |   |   |   |   |
| KVM                                    |       | $                                                  | 87,459     |                                             | $          | 83,496 |   | $ | 168,147 |   | $ | 161,471 |   |
| Serial Management                      |       | 12,752                                             |       | 13,817                                           |       | 24,038 |   | 14,810 |   |
| Embedded software and solutions        |       | 7,897                                              |       | 8,828                                            |       | 15,474 |   | 14,961 |   |
| Other                                  |       | 6,856                                              |       | 5,682                                            |       | 12,409 |   | 11,079 |   |
| Total Management  Systems net revenue: |       | $                                                  | 114,964    |                                             | $          | 111,823 |   | $ | 220,068 |   | $ | 202,321 |   |

 

The LANDesk Division contributed $27.6 million of net revenue duringthe second quarter of 2007, or 18% of our net revenue.  LANDesk’s revenue and bookings are comprisedof both license-based revenue, primarily LANDesk Management Suite, andsubscription-based revenue, primarily maintenance and LANDesk Security Suite,with the growth in bookings from the subscription-based revenue outpacing thegrowth in license-based revenue.  Thischange in mix has an impact on the revenue we recognize because subscriptionrevenue is deferred and amortized over the subscription term.  Sales by product line for our LANDesk Divisionfor the three and six months ended June 29, 2007 are provided below.  As LANDesk was acquired in August 2006, therewere no corresponding sales for the three and six month periods ended June 30,2006.
|                                | ** ** | **For the Three  Months Ended** | ** ** | **For the Six Months  Ended** | ** ** |
|--------------------------------|------------|------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                     | ** ** | **June 29, 2007**                    | ** ** | **June 29, 2007**                  | ** ** |
| LANDesk Division  net revenue: |       |                                           |       |                                         |       |
| Licenses and royalties         |       | $                                              | 16,800     |                                         | $          | 30,171 |   |
| Maintenance and services       |       | 10,763                                         |       | 21,246                                       |       |
| Total LANDesk  net revenue     |       | $                                              | 27,563     |                                         | $          | 51,417 |   |

 

Weexpect continued improvement and growth in our revenues and earnings during thesecond half of 2007.  Based oninformation from industry analysts as well as our resellers and end customers,we expect IT capital spending will increase during this time period.  Usually the second half of the year seeshigher IT capital spending in general and higher revenue for us than in thefirst half of the year. We expect this seasonal trend will recur in 2007. Weexpect our revenue for the second half of 2007 will be within a range of $330to $350 million.

*Gross profit.* Gross profit isaffected by a variety of factors: including the ratio of sales among ourdistribution channels, as OEM sales typically have lower gross margins than ourbranded sales; absorption of fixed costs as sales levels fluctuate; productmix; raw material costs; labor costs; new product introductions by us and byour competitors; royalty revenue; sales levels of our software products, whichtend to have higher gross margins than our hardware products; and ouroutsourcing of manufacturing and assembly services. Gross profit increased to $95.1 million, or 63.3% of sales, in thesecond quarter of 2007 compared to $71.4 million, or 60.5% of sales, in thesecond quarter of 2006 primarily due to the contribution from our LANDeskacquisition.  The increase ingross profit was disproportionately higher than the 27% increase in revenue dueto the impact of LANDesk software and maintenance revenue, which has asubstantially higher gross profit than that experienced by the rest ofAvocent.  Gross profit from LANDesksoftware and maintenance contributed 1.6 points of the 2.8 point increase forthe second quarter, excluding the $2.8 million of other intangible amortizationresulting from the LANDesk acquisition included in cost of sales.  The increase in gross profit from the LANDeskdivision was partially offset by the additional $2.8 million included in costof sales from amortization of otherintangible assets recorded as a result of the LANDesk acquisition related tointernally developed software for resale. Gross profit increased from $127.4 million, or 59.9% of sales, in thefirst six months of 2006 compared to $176.1 million, or 62.1% of sales, in thefirst six months of 2007 for the same reasons as that of the increase for thequarter.

Based on our forecasted revenuerange for the second half of 2007, we expect positive contributions fromLANDesk, which we 

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expect will have a positive affect on our grossmargin.  We expect the combination ofthese factors to offset price declinesandcompetitive factors in the last half of 2007. Accordingly, we expect gross margins to be between 64.5% and 65.5% forthe remainder of 2007.

*Research and development expenses.*  Research and development expenses were $21.2million, or 14.1% of sales, in the second quarter of 2007 compared to $14.3million, or 12.1% of net sales, in the second quarter of 2006.  The increase in the amount spent on researchand development was primarily due to the additional costs from the LANDeskacquisition, including costs related to the integration of the Avocent andLANDesk software platforms.  Our LANDeskdivision recorded $6.2 million of researchand development expense for the second quarter of 2007.

Research and development expensesfor the first six months of 2007 increased to $42.1 million from $27.5 millionfrom the first six months of 2006 primarily due the additional costsfrom the Cyclades and LANDesk acquisitions.  LANDesk recorded $11.7 million of researchand development expenses in the first six months of 2007.  Additionally, the amount ofstock-based compensation expensed in the first six months of 2007, $2.5million, was higher as compared to 2006, $1.1 million, primarily because ourBoard did not approve the 2006 grants until the second quarter of 2006, andaccordingly, we did not begin expensing the related cost until the secondquarter of 2006.  As a percentage of net sales, year-to-date research and developmentexpenses increased to 14.8% in the first half of 2007 from 13.0% in the firsthalf of 2006.

We believe that the timely development of innovativeproducts and enhancements to existing products is essential to maintaining ourcompetitive position, and we will continue to make significant investments inresearch and development.  We believeresearch and development expenses for the remainder of 2007 will be relativelyconsistent with the second quarter of 2007 and within the range of $21.0million to $22.0 million each quarter.

*Acquired in-process research anddevelopment expense.*  Acquisition related expenses in the first sixmonths of 2006 were comprised solely of the non-recurring write-off of $2.1 million of in-process researchand development expense related to the acquisition of Cyclades.  There were no such charges in the secondquarter of 2006 or the first six months of 2007.

***Selling, general and administrativeexpenses.***  Selling, general and administrative expenseswere $52.4 million, or 34.9% of net sales, for the second quarter of 2007compared to $32.7 million, or 27.7% of net sales, for the second quarter of2006.  The increase in selling, generaland administrative expenses was attributed to increased headcount and othercosts attributable to the addition of LANDesk, which recorded $16.5 million ofselling, general and administrative expenses in the second quarter of 2007.  Selling,general and administrative expenses were $101.1 million, or 35.7% of net sales,for the first half of 2007 compared to $56.1 million, or 26.4% of net sales,for the first half of 2006.  Again, theincrease in selling, general and administrative expenses was attributed toincreased headcount and other costs attributable to the addition of LANDesk,which recorded $32.6 million of selling, general and administrative expenses inthe first six months of 2007.

**We believe certain elements ofselling, general and administrative expenses will be flat from the secondquarter of 2007, with the exception**of sales incentive compensation, which we expect to increase as aresult of increased revenue as compared to the first half of 2007.  As a result of these factors, includingstock-based compensation expense, we expect selling, general and administrativeexpenses to be in the range of $53 to $56 million in each of the third andfourth quarters of 2007.

***Amortization of intangible assets***. Amortization of $7.6 million in the second quarter of 2007 included theamortization of the identifiable intangible assets created as a result of theacquisitions of OSA, Sonic Mobility, Cyclades, and LANDesk.  Amortization of $4.9 million in the secondquarter of 2006 included primarily the amortization of the identifiableintangible assets created as a result of the acquisitions of Equinox, 2C,Soronti, Crystal Link, OSA, Sonic Mobility and Cyclades.  Amortization of $16.5 million in the firsthalf of 2007 included the amortization of the identifiable intangible assetscreated as a result of the acquisitions of OSA, Sonic Mobility, Cyclades, andLANDesk.  Amortization of $7.3 million inthe first half of 2006 included primarily the amortization of the identifiableintangible assets created as a result of the acquisitions of Equinox, 2C,Soronti, Crystal Link, OSA, Sonic Mobility and Cyclades.  The increase in amortization expense relatesprimarily to additional amortization expense related to the intangible assetsrecorded in the acquisitions of Cyclades and LANDesk.  Amortization expense is expected to beapproximately $8 million in each of the third and fourth quarters of 2007.

*Stock-Based Compensation. *We recordcompensation expense in each line of our condensed consolidated financialstatements based on the department in which an employee works.  Stock-based compensation increased from $2.7million in the second quarter of 2006 to $5.1 million in the second quarter of2007.  The increase was due primarily tothe addition of LANDesk employees who were granted retention awards inSeptember 2006 and additional awards to directors, officers, and employeesgranted during the second quarter of 2007. Of the $5.1 million of stock-basedcompensation recorded in the second quarter of 2007, $301,000 was recorded incost of sales, $1.4 million was recorded in research and development expense,and $3.4 million was recorded in selling, general and administrative expenses. * *Of the $2.7 millionof stock-based compensation recorded in the second quarter of 2006,

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$164,000was recorded in cost of sales, $762,000 was recorded in research anddevelopment expense, and $1.8 million was recorded in selling, general andadministrative expenses.

For the first sixmonths of 2007, we recorded $8.8 million of stock-based compensation: $480,000was recorded in cost of sales, $2.5 million was recorded in research anddevelopment expense, and $5.8 million was recorded in selling, general andadministrative expenses. * *For the first six months of 2006,we recorded $3.6 million of stock-based compensation: $214,000 was recorded incost of sales, $1.1 million was recorded in research and development expense,and $2.3 million was recorded in selling, general and administrative expenses.

We expectstock-based compensation expense to be in the range of $5.0 million to $6.0million in each of the third and fourth quarters of 2007.  We believe equity based compensation is animportant part of our total compensation packages and is needed to attract andretain key employees.

*Netinvestment income**.** *Net******investmentincome decreased to $904,000 in the second quarter of 2007 as compared to $2.1million in the second quarter of 2006.  The decrease in net investment income in thesecond quarter of 2007 was the result of lower cash and investments as a resultof funding the cash component of approximately $200 million of the LANDeskacquisition in the third quarter of 2006, as well as funding the purchase ofcommon stock under our stock repurchase program.  Net******investmentincome decreased to $1.8 in the first half of 2007 as compared to $5.2 millionin the first half of 2006.  The decrease in investment income in the firsthalf of 2007 was also the result of lower cash and investments as a result offunding the purchase of Cyclades late in the first quarter of 2006 and the cashcomponent of the LANDesk acquisition in the third quarter of 2006, purchases ofcommon stock under our stock repurchase program, and repayments of our line ofcredit.

*Net realized investment gains( losses). *Net realized investment lossesdecreased from a $2,000 gain in the second quarter of 2006 to zero in secondquarter of 2007.  For the first sixmonths, net losses improved from $53,000 in2006 to zero in 2007.

*Interest expense. *Interest expense was $2.3 million and $4.5 million inthe second quarter and first six months of 2007, respectively.  Interest expense was $137,000 and $147,000 inthe second quarter and first six months of 2006, respectively.  Interest expense results from borrowingsunder our $250 million unsecured line of credit obtained in the second quarterof 2006, which we used to finance a portion of the LANDesk acquisition andshare repurchases.

*Other income (expense), net.*  Net otherincome improved from an expense of $200,000 in the second quarter of 2006 toincome of $15,000 in the second quarter of 2007. Net other expense increasedfrom an expense of $211,000 in the first half of 2006 to an expense of $302,000in the first half of 2007.

*Provision (benefit) for income taxes.*  Theeffective tax rate in the second quarter of 2007 was a benefit of approximately19.8% compared to a provision of approximately 28.4% in the second quarter of2006.  The benefit for income taxes was$2.5 million for the second quarter of 2007, compared to a provision of $5.4million in the second quarter of 2006. The effective tax rate in the first half of 2007 was a benefit ofapproximately 17.8% compared to a provision of approximately 28.2% in the firsthalf of 2006.  The benefit for incometaxes was $2.4 million for the first half of 2007, compared to a provision of$10.4 million in the first half of 2006. As discussed in Note 10 to theconsolidated financial statements, the decrease in the effective tax rate wasprimarily the result of making certain tax elections during the second quarterof 2007 related to the LANDesk acquisition and the resulting $6.5 million taxbenefit for the previously expensed $18.6 million of in-process R&D.Deferred tax liabilities have been adjusted as a result of the tax electionsrelated to the LANDesk acquisition. We adopted FASB Interpretation No. 48, “Accountingfor Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109”on January 1, 2007. As a result of adopting this FASB Interpretation, werecorded an increase to reserves for uncertain tax positions of $2.9million.  This increase was recorded as an increase to the January 1, 2007accumulated deficit balance.

*Net income.*  Netincome for the second quarter of 2007 was $15.0 million compared to $13.6million for the second quarter of 2006, as a result of the factors detailed inthe above discussion.  Net income, as apercentage of sales for the second quarter of 2007, was 10.0% compared to 11.5%for the second quarter of 2006.  Netincome for the first half of 2007 was $15.7 million compared to $26.5 millionfor the first half of 2006, as a result of the factors detailed in the abovediscussion.  Net income, as a percentageof sales for the first half of 2007, was 5.6% compared to 12.5% for the first halfof 2006.

**Liquidity and Capital Resources**

As of June 29, 2007, our principal sources of liquidity consisted of $109million in cash, cash equivalents, and investments.  We also have a $250 million unsecured fiveyear revolving bank line of credit that is available for general corporatepurposes.  The line of credit currentlybears an interest rate of LIBOR plus 70 basis points.  We reduced the outstanding balance of ourline of credit by $35.0 million during the second quarter of 2007, resulting ina balance of $115 million outstanding under the line of credit as of June 29,

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2007.  We classify the entire obligation aslong-term as it carries a five-year term and has no required repaymentschedule.  We expect to repay theborrowings with future cash flows from operations or potential future capitalraising activities.

Our operating activities generated cash of $57.5 million in the first six months of 2007, compared to approximately $31.6 million in the first six months of 2006.  The improvement in cash flow in the first half of 2007 was primarily the result of increases in accounts receivable collections during the second quarter of 2007, a decline in inventory during the second quarter of 2007 and an increase in cash earnings.  Our accounts receivable decreased $16.1 million from December 31, 2006 to June 29, 2007 as a result of the improved cash collections.  In addition to the decline in our accounts receivable balance, our days sales outstanding (DSO) improved to 67 days from approximately 74 days at the end of the first quarter of 2007.  DSO improvement is also a direct result of improved collections during the second quarter of 2007.  Adding LANDesk customer balances to our accounts receivable, which tend to have longer payment terms than legacy Avocent balances, offset some of the improvement in our DSO.  However, LANDesk DSO improved from approximately 108 days at the end of the first quarter of 2007 to 93 days at the end of the second quarter of 2007.  Excluding our LANDesk Division, our DSO was approximately 61 days at the end of the second quarter of 2007 and was 67 days at the end of the first quarter of 2007.

Inventories decreased $9.6 million from December 31, 2006 to June 29, 2007.  Our operations group worked to reduce our inventories in the first half of 2007, especially during the second quarter.   As a result our inventory turns improved to 6.0 in the second quarter of 2007, compared to 4.6 for the first quarter of 2007.  A decline in accrued compensation due to the payment of 2006 annual bonuses partially offset the decline in accounts receivable and inventories impact to cash flow from operations for the first half of 2007.

In the ordinarycourse of our business, we may at any point in time have a significant amountof contractual commitments not yet recognized in our financial statements.  These commitments relate primarily to ourneed to schedule the purchase of inventories in advance of the relatedforecasted sales to customers.  We havelonger lead times for the products we purchase from suppliers based in Asiathan those for our U.S. based and European suppliers.  Our actual contractual commitments aretypically limited to products needed for one to three months of forecastedsales.  The liabilities for theseinventory purchases along with the related inventory assets are typicallyrecognized upon our receipt of the products. We also have at any point in time a variety of short term contractualcommitments for services such as advertising, marketing, accounting, legal, andresearch and development activities.  Theliabilities for these services and the related expenses are typicallyrecognized upon our receipt of the related services.  As of June 29, 2007, we had approximately$27.9 million of such purchase commitments. None of our expected purchase commitments requires payment beyond thenext year. During the second quarter of 2007, we recognized a tax benefitof approximately $6.5 million to take into consideration the tax impactsassociated with the in-process R&D previously charged to expense on a grossbasis at acquisition.  We haveindemnified former LANDesk shareholders for any personal tax consequencesshould this election create current tax obligations for these formershareholders.

We adopted FASBInterpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretationof FASB Statement No. 109” on January 1, 2007. As a result of adopting thisFASB Interpretation, we recorded an increase to reserves for uncertain taxpositions of $2,900.  This increase was recorded as an increase to theJanuary 1, 2007 accumulated deficit balance.  As of June 30, 2007 we hadtotal reserves for uncertain tax positions related to gross unrecognized taxbenefits of $11,717 of which $9,617, if recognized, would affect the effectivetax rate.  We recognize potential accrued interest and penalties relatedto unrecognized tax benefits from our global operations within income taxexpense. As of June 30, 2007, we had accrued interest expense related to theunrecognized tax benefits of approximately $2,728.  (*see Note 10 in the notes to the condensedconsolidated financial statements in Part I, Item 1*).”

We may use aportion of our cash and investments or our line of credit for strategicacquisitions of technologies and companies that will enhance and complement ourexisting technologies and help increase our sales.

We repurchased587,000 shares of our common stock for a total cost of approximately $17.9million during first half of 2007 under the stock repurchase program approvedby our Board of Directors.  During thefirst quarter of 2007, our Board approved the repurchase of up to an additional2.0 million shares under our share repurchase program.  As of June 29, 2007, we had the authorityfrom our Board to repurchase an additional 1.6 million shares under thisprogram.

**Investments**

Ourinvestments consist of corporate bonds, municipal bonds, commercial paper, andmortgage backed securities guaranteed by U.S. government agencies.  We classify our debt and equity securities asavailable-for-sale securities and report them at fair value, with unrealizedgains and losses excluded from earnings and reported as a separate component ofstockholders’ equity.  We periodicallyreview our investment portfolio for investments considered to have sustained another-than-temporary decline in value.  

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Upon review of ourinvestment portfolio as of June 29, 2007, no investments were considered tohave sustained an other-than-temporary decline, and no charge was recorded inthe first half of 2007.

**Recently Issued AccountingStandards and Regulatory Standards**

**See above regarding adoption of FIN48 during the first quarter of 2007.**

**Item 3.**  **Quantitativeand Qualitative Disclosures About Market Risk.**

Our primary market risk is the potential loss arisingfrom increases in interest rates, which could have an adverse impact on thefair value of our investment securities. Our investment policy is to manage our investment portfolio to preserveprincipal and liquidity while maximizing the return on our investment portfoliothrough the investment of available funds.  We diversify our investment portfolio byinvesting in a variety of highly-rated investment-grade securitiesand through the use of different investment managers.  Our investment securities portfolio isprimarily invested in securities with maturities (or interest rate resets) oftwo years or less with at least an investment grade rating to minimize interestrate and credit risk as well as to provide for an immediate source offunds.  Market risk, calculated as the potentialchange in fair value in our investment portfolio resulting from a hypothetical10% change in interest rates, was not material at June 29, 2007.  We generally hold investment securities untilmaturity.

We also faceinterest rate risk on our bank line of credit which currently bears interest ata variable rate of LIBOR plus 70 basis points. We have partially hedged this exposure to interest rate risk with aninterest rate swap, which currently has a remaining notional amount of $110million, through a well-established financial institution.

We also face foreign currency exchange rate risk to theextent that the value of certain foreign currencies relative to the U.S. dollaraffects our financial results.  Ourinternational operations transact a portion of our business in currencies otherthan the U.S. dollar, predominantly the euro, and changes in exchange rates maypositively or negatively affect our revenue, gross margins, operating expenses,and retained earnings since these transactions are reported by us in U.S.dollars.  We occasionally purchaseforeign currency forwards aimed at limiting the impact of currencyfluctuations.  These instruments provideonly limited protection against currency exchange risks, and there can be noassurance that such an approach will be successful, especially if a significantand sudden decline occurs in the value of local currencies.  As of June 29, 2007, we had four openforward contracts with an approximate fair value of $(5,000).

**Item 4.** **Controlsand Procedures.**

(a) *Evaluation of disclosure controls and procedures.*    Based on their evaluation as of June 29,2007, our Chief Executive Officer and Chief Financial Officer have concludedthat our disclosure controls and procedures (as defined in Rules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934) are effective.

(b) *Changes in internal control over financial reporting*.    There were no changes in our internalcontrols over financial reporting during the quarter ended June 29, 2007 thatmaterially affected or is reasonably likely to materially affect, our internalcontrols over financial reporting.  Wehave begun to integrate LANDesk into our standard processes and controls andERP system and we expect to complete the integration during 2007.

### **PART II — OTHER INFORMATION**

**Item 1.    Legal Proceedings.**

In March 2006, TFSElectronic Manufacturing Services, Inc. (“TFS”) filed a Third-Party Complaintand an Objection to Claim of Avocent Corporation with the United StatesBankruptcy Court, District of Arizona. As a result of the complaint, an adversary proceeding has beencommenced against us in the TFS bankruptcy case in an effort to disallow ourclaim in its entirety.  TFS also seeksdamages in an undetermined amount for our alleged breach of contract, negligence,negligent misrepresentations, breaches of warranty, unjust enrichment,disparagement of TFS’ business, and quantum merit.  TFS is seeking recovery of actual damages,punitive damages, attorneys’ fees, pre- and post-judgment interest, costs, andthe imposition of joint and several liability as to us and a namedco-defendant, TopSearch Printed Circuits (HK), Ltd.  (“TopSearch”).  The matter has been consolidated with aseparate matter between TFS and TopSearch pending in the United States DistrictCourt for the District of Arizona, for purposes of discovery through pre-trial.The court has ordered that early mediation be scheduled and a mediator has beenassigned.  Discovery is underway. We intend to vigorously defend our positions.

In January 2007,we filed a complaint for patent infringement in the United States DistrictCourt for the Western District of Washington against Aten Technology, Inc.,Aten International Co., Ltd, Belkin Corporation, Rose Electronics and itsgeneral partners, 

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and Trippe ManufacturingCompany.  The defendants have filedcounterclaims alleging non-infringement, unenforceability, and invalidity, anddiscovery is currently underway.  In May2007, we entered into a Settlement and License Agreement with TrippeManufacturing, and dismissed Trippe from the lawsuit.

In March 2007,KBM Enterprises, formerly a contract manufacturer for us, fileda complaint against us in the Circuit Court of Madison County, Alabama,seeking $9.5 million for costs allegedly incurred by KBM in itsmanufacturing efforts on our behalf.  Wehave filed an answer and counterclaims against KBM and one of its principals,and we intend to vigorously defend our positions.  Discovery is currently underway.

In April 2007, wefiled a complaint for declaratory judgment against Aten International Co., Ltd.in the United States District Court for the Northern District of Alabama.  We are seeking a declaratory judgment thattwo patents owned by Aten and asserted against Avocent are invalid and thatcertain of products alleged by Aten to infringe do not infringe these patents.

**Item1A.  Risk Factors.**

*THISQUARTERLY REPORT CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS ANDUNCERTAINTIES THAT COULD CAUSE OUR FUTURE ACTUAL RESULTS TO DIFFER MATERIALLY FROMTHOSE DISCUSSED IN THIS QUARTERLY REPORT. THESE RISKS AND UNCERTAINTIES INCLUDING THE FOLLOWING:*

**Ouracquisition of LANDesk could disrupt our business, expose us to new risks, andadversely affect the results of our operations.**

We acquired LANDesk Group Limited (“LANDesk”) in thethird quarter of 2006.  This acquisitionrepresents a departure from our core products and technologies and our entryinto a new market (systems management software products and services) in whichwe have very limited experience.  Themarket for systems management products is highly competitive, and we expectcompetition in this market to continue and intensify.  Many of LANDesk’s competitors havesubstantially greater financial, customer support, technical and marketingresources, larger customer bases, longer operating histories, greater namerecognition, and more established relationships in the industry than LANDeskhas, and we may not have the resources or expertise to compete successfullywith them in the future.

The LANDeskacquisition may divert the attention of management and other personnel from ourcore business operations, which may adversely affect our financial performancein one or more quarters.  LANDeskpresents us with new and different issues regarding revenue recognition,channel management, and collection of existing or new receivables, any of whichcould have a material adverse effect on our business, financial condition, andresults of operations.  We will need toexpand and improve our internal systems, including our management informationsystems, to monitor these items.  Inparticular, we have not yet completed our review and assessment of the internalsystems and controls over the LANDesk financial reporting and informationsystems, and we will also need to expand our operating, administrative, andfinancial systems and controls to include the LANDesk operations.  The acquisition and integration of LANDeskand its software products and services will require significant time, expense,and resources and subject us to the acquisition risks detailed below as we moveinto this new market.  Any failure tosuccessfully integrate and operate LANDesk could thus materially and adverselyaffect our result of operations, cash flows, and financial position.

**We haveacquired, and expect to continue to acquire, technologies, and companies andthese acquisitions could disrupt our business or expose us to other risks.**

A key component ofour engineering and product development strategy and our future growth is theinvestment in or the acquisition of technologies and companies, including ouracquisitions of Cyclades Corporation and LANDesk Group Limited (“LANDesk”) in2006.  We intend to continue to executeour strategy through the acquisition of technologies or companies or throughinvestments in complementary companies, products, personnel, or technologies,and it is likely we will complete such acquisitions or investments in thefuture.  These acquisitions andinvestments involve many risks, including the following:

·                                          Difficultyintegrating the acquired company’s personnel, products, product roadmaps,technologies, systems, processes, and operations, including product delivery,order management, and information systems;

·                                          Difficultyin conforming the acquired company’s financial policies and practices to ourpolicies and practices and in 

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implementing and maintaining adequate internal systems and controlsover the financial reporting and information systems of the acquired company;

·                                          Diversionof management’s attention and disruption of ongoing business;

·                                          Difficultyin combining product and technology offerings and entering into new markets(such as software) or geographical areas in which we have no or limited directexperience and where our competitors may have stronger market positions;

·                                          Lossof management, sales, technical, or other key personnel;

·                                          Revenuefrom the acquired companies not meeting our expectation, and the potential lossof the acquired company’s customers, distributors, resellers, suppliers, orother partners;

·                                          Delaysor difficulties and the attendant expense in evaluating, coordinating, andcombining administrative, manufacturing, research and development and otheroperations, facilities, and relationships with third parties in accordance withlocal laws and other obligations  whilemaintaining adequate standards, controls and procedures, including financialcontrols and controls over information systems;

·                                          Difficultyin completing projects associated with acquired in-process research anddevelopment;

·                                          Incurringamortization expense related to certain intangible assets and recordinggoodwill and non-amortizable assets that will be subject to impairment testingand possible impairment charges;

·                                          Dilutionof existing stockholders as a result of issuing equity securities, includingthe assumption of any stock options issued by the acquired company;

·                                          Overpaymentfor any acquisition or investment or unanticipated costs or liabilities;

·                                          Assumptionof liabilities of the acquired company, including any potential intellectualproperty infringement claims or other litigation; and

·                                          Incurringsubstantial write-offs, restructuring charges, and transactional expenses.

Ourfailure to manage these risks and challenges could materially harm ourbusiness, financial condition, and results of operations.  In addition, if we do not successfullyaddress these challenges in a timely manner, we may not fully realize all ofthe anticipated benefits or synergies on which the value of a transaction wasbased.  Future transactions could causeour financial results to differ from expectations of market analysts orinvestors for any given quarter.

**Intensecompetition from new and existing competitors or consolidation in the serverand systems management sectors could impair our ability to grow our business,to sustain our profitability, and to sell our products and technologies.**

The markets forour products and technologies are highly fragmented, rapidly evolving, andintensely competitive, and we expect this competition to continue and increase. Aggressive competition from both hardware and software products andtechnologies could lengthen the customer evaluation process and result in pricereductions and loss of sales, which would materially harm our business. Our business is becoming increasingly sensitive to the introduction of newproducts and technologies (such as virtualization), price changes, andmarketing efforts by numerous and varied competitors.  Accordingly, ourfuture success will be highly dependent upon our timely completion andintroduction of new products and technologies and features at competitiveprices and performance levels that address the evolving needs of ourcustomers.  We continue to experience aggressive price competition andincreased customer sensitivity to product prices, and pricing and marginpressures are likely to increase in the future.  Because of thiscompetition, we may have to continue to lower the prices of many of ourproducts and technologies or offer greater functionality within our products todeliver greater value to customers to stay competitive, while at the same timetrying to maintain or improve our revenue and gross margin.  Because ourbusiness model is based on providing innovative and high quality products, wemay spend a proportionately greater amount on research and development thansome of our competitors.  If we cannot proportionately decrease our coststructure on a timely basis in response to competitive price pressures, ourgross margin and profitability could be adversely affected.  In addition,if our pricing, functionality, and other factors are not sufficientlycompetitive, or if there is an adverse reaction to our product decisions, wemay lose market share in certain areas, which could adversely affect ourrevenue and prospects.

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We compete forsales of switching systems and extension products with companies such asRaritan Computer, Rose Electronics, Minicom Advanced Systems, Aten, Belkin,Lantronix, and Digital V6.  These products also face competition fromsoftware providers (such as Microsoft, Computer Associates, Tivoli, Symantec,Novell, and BMC Software), who may be able to offer software productscompetitive with our hardware products at a much lower cost or even bundled forfree, and from server manufacturers (including our OEM customers), who are ableto offer their competitive technologies or products at the time of the serversale.  These competitive software and hardware products address many ofthe problems our switching systems and technologies, extension products, andremote access products are designed to address.

We compete forsales of our systems management products with companies such as Microsoft,Computer Associates, BMC Software, Novell, and Symantec, many of whom havegreater financial, technical, and marketing resources, a larger customer base,a longer operating history, greater name recognition, and more establishedrelationships in the industry than we do, and may offer their own or thirdparty competitive software products at a lower cost or bundled for free withtheir other products.  Microsoft, in particular, has delivered competitivesystems management products and announced its intention to continue to developcompetitive software.  If Microsoft issuccessful in delivering systems management software that is competitive withour products, our ability to grow our systems management business may belimited.

These current andpotential competitors may be able to respond more quickly to new or emergingtechnologies or products and to changes in customer requirements or to devotegreater resources to the research, development, promotion, sale, and support oftheir products and technologies than we do.  In addition, current andpotential competitors have established or may establish cooperative relationshipsamong themselves or with third parties that expand or enhance the ability oftheir products and technologies to address the needs of our current andprospective customers.  Some of these competitors can also bundlehardware, software, and services together, and offer a more complete set ofhardware products and services than we are able to offer.  We may not be able to compete successfullyagainst current and future competitors and competitive pressure may materiallyharm our business, financial condition, operating results, and cash flows, orimpair our ability to achieve our desired results.

Certain of ourcustomers, such as Dell, Hewlett-Packard, IBM, Symantec, and Microsoft,presently offer competitive hardware and/or software products and technologiesthat address many of the problems our products and technologies address. These customers could decide to manufacture or enhance their own switching,IPMI or other embedded technologies, or systems management or securityproducts, or offer products or technologies supplied by competitors. Companies with hardware manufacturing experience or network managementproducts, many of which are substantially larger than we are and havesignificantly more financial resources than we do, also offer products or technologiesthat compete with us.  Established companies with hardware manufacturingor network management experience (such as Intel, Cisco, or EMC) could alsooffer new products, new technologies (such as virtualization), or new solutionsthat compete with, or reduce the demand for, our products and technologies.

There has beenconsolidation in the markets in which we compete, which we believe willcontinue and could lead to increased price competition and other forms ofcompetition as companies attempt to maintain or extend their market positionsin the rapidly changing IT industry.  Inaddition, we may face competition in the future from large establishedcompanies or from emerging companies that have not previously entered themarket or that do not currently have products that directly compete with ourproducts.  This could lead to morevariability in our operating results due to lengthening of the customerevaluation process and/or the loss of business to these competitors, which mayadversely affect our business, financial condition, and results of operations.

**Ourfailure to respond to rapid technological change or to introduce successful newproducts and technologies may result in reduced revenue or revenue growth.**

The process ofdeveloping or acquiring new products and technologies and enhancing existingproducts and technologies is complex, costly, and uncertain, and any failure byus to anticipate customers’ changing needs and emerging technological trendsaccurately could significantly harm our market share and results ofoperations.  We must make long-term investments, develop or obtainappropriate intellectual property, and commit significant resources beforeknowing whether our predictions will accurately reflect customer demand for ourproducts and services.  After we develop a product, we must thenaccurately forecast volumes and configurations that meet customer requirements,manufacture appropriate hardware volumes quickly and at low cost and developcost-effective software solutions, and train our sales force andresellers.  Any delay in the development, production, marketing of, ortraining for new products or technologies could result in our not being amongthe first to market, which could further harm our competitive position.

Sales ofswitching, extension, and remote access products and technologies arecharacterized by rapid technological advances, frequent new product andtechnological introductions and enhancements, and significant pricecompetition.  If we do not keep pace with these changes, we will losecustomers, and our business will be adversely affected.  The introductionof products or technologies incorporating superior alternatives such asvirtualization hardware and software, other switching software, the emergenceof new 

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industry standards, orchanges in pricing structure could render our existing products andtechnologies and those under development obsolete or unmarketable.  Newtechnologies offered by us or our competitors could compete with our existingproducts at a lower price, which could reduce our revenue.

Our hardwareproducts combine components, such as printed circuit boards, connectors,semiconductors, memory, cable assemblies, power supplies and enclosures thatare manufactured by other companies and are generally available to competitorsand potential competitors.  Our software products combine software orcontent from third parties, such as open source software or technology,drivers, security, or anti-virus information, which may also be generallyavailable to our competitors and potential competitors.  Our futuresuccess will depend in large part upon continued innovative application ofcommercially available components and third party software or technology, andcontinued enhancements to our proprietary hardware, software, firmware, andother technologies, the expansion and enhancement of existing products andtechnologies, and our development and introduction of new products andtechnologies that address changing customer needs on a cost-effective andtimely basis.  If we fail to respond on a timely basis to technologicaldevelopments, changes in industry standards, customer requirements, competitiveproducts, product localization, or software innovations, we will losecustomers, and our business will be greatly harmed.  Similar results couldoccur if we experience significant delays in the development or introduction ofnew products or technologies.

Due to oursignificant reliance on OEM relationships, our hardware development efforts mayoften be focused on developing new products, technologies, or enhancements forOEM customers.  As a result, our OEM relationships may negatively affectour ability to develop new and enhanced products and technologies for ournon-OEM customers.  Moreover, these new products, technologies, orenhancements for OEM customers may not be available to, or readily marketableto, other customers without significant modification and delay.  Theexpansion, termination, or significant disruption of our relationship withcertain OEMs or other customers for whom we devote significant productdevelopment resources is likely to result in lost opportunities with respect tothe development of products, technologies, or enhancements for our othercustomers.

**We havelimited protection of proprietary rights and face risks of third partyinfringements.**

Our future successdepends in part upon our ability to protect proprietary rights in our productsand technologies.  We seek to protect our intellectual property rights byinvoking the benefits of the patent, trademark, copyright, trade secret, andunfair competition laws of the United States and other countries andprotections provided by confidentiality and nondisclosure agreements and otherlegal agreements.  These laws and practices, however, afford only limitedprotection.  There can be no assurance that the steps we have taken toprotect our intellectual property rights, or that the steps we take in thefuture, will be adequate to prevent or detect misappropriation of ourintellectual property or technologies or that our competitors will notindependently develop proprietary or other technologies that are substantiallyequivalent or superior to our products or technologies.  In addition, our proprietary information maybe misused or improperly disclosed by third parties entrusted with thisinformation.

The U.S. Patentand Trademark Office has issued several patents to us for various aspects ofour products.  We have various corresponding patent applications pendingunder the provisions of the Patent Cooperation Treaty, which permits the filingof corresponding foreign patent applications in numerous foreign countrieswithin a limited time period.  We also have other United States andforeign patent applications pending.  There can be no assurance that anyadditional patents will be issued from any of those pending applications orthat any patents will be issued in any additional countries where our productscan be sold.  Claims allowed in our patents or in any pending patentapplications may not be of sufficient scope or strength for, or providemeaningful protection or any commercial advantage to us or such claims may notbe upheld if challenged.  Also, competitors may develop their ownintellectual property or technologies, obtain their own patents, or challengethe validity of, or be able to design around, our patents.  The laws ofcertain foreign countries in which our products are or may be developed,manufactured, or sold (particularly certain countries in Asia) may not protectour products or intellectual property rights to the same extent as do the lawsof the United States and thus increase the likelihood of piracy of ourtechnologies and products.

We have, in thepast, filed complaints for patent infringement against a number of companies,and we may initiate claims or litigation against other third parties forinfringement of proprietary rights or to establish the validity of proprietaryrights.  Similarly, our competitors or other third parties may initiateclaims or litigation against us alleging infringement of their proprietaryrights or improper use of their intellectual property, and from time to time,third parties notify us that our products may infringe their intellectualproperty rights, which regardless of merit, requires our time and resources toevaluate and respond.  Existinglitigation, and any other litigation relating to intellectual property to whichwe become a party, is subject to numerous risks and uncertainties, includingthe risk of counterclaims or other litigation against us, and we may not besuccessful in any such litigation.  Litigation is expensive, and theexisting litigation or any other litigation by or against us could result insignificant additional expense, divert the efforts of technical and managementpersonnel, whether or not such litigation results in a favorable determination,harm our relationships with existing customers, and deter future customers frompurchasing or licensing our products.  In the event of an adverse resultin any such litigation, we could be required to pay substantial damages,suspend or cease the development, manufacture, use, marketing, and sale of anyinfringing products, expend significant resources to redesign products ordevelop non-infringing technology, discontinue the use 

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of certain processes, orobtain licenses to the infringing technology.  There can be no assurancethat we would be successful in such development or that such licenses would beavailable on reasonable terms, or at all, and any such development or licensecould require us to expend substantial time and other resources.  In theevent that any third party makes a successful claim against us, or ourcustomers, and a license is not made available on commercially reasonableterms, our business, financial condition, and results of operations could beadversely affected.  In addition, anydispute involving our intellectual property could result in our customers,distributors, or resellers becoming involved in the litigation, which couldtrigger indemnification obligations in certain of our sales, license, orservice agreements.

The IT industry ischaracterized by vigorous pursuit and protection of intellectual propertyrights or positions, which has resulted in significant and often protracted andexpensive litigation.  We have in the past been, and we may from time totime in the future be, a party in proceedings alleging infringement ofintellectual property rights owned by third parties.  If necessary ordesirable, we may seek licenses under such intellectual property rights. However, licenses may not be offered on terms acceptable to us, or atall.  The failure to obtain a license from a third party for technologyused by us could cause us to incur substantial liabilities and to suspend orcease the manufacture of products requiring such technology. Additionally, current or future competitors could obtain patents that mayprevent us from developing or selling our products.

**We arelikely to experience fluctuations in operating results.**

We have in thepast experienced substantial fluctuations in revenue, bookings, and operatingresults, on a quarterly and an annual basis, and we expect these fluctuationswill continue in the future.  Our operating results will be affected by anumber of factors, including, but not limited to:

·                                          Thevolume, timing, pricing, and contractual terms of orders, particularly fromOEMs, resellers, and other large customers, a significant portion of which tendto occur late in each quarter;

·                                          Thetiming of shipments;

·                                          Thetiming of new product introductions, new technologies, and enhancements by usand by our competitors, and the possibility that customers may defer purchasesof our products in anticipation of these new products, new technologies, andenhancements;

·                                          Changesin or our failure to accurately predict product or distribution and resellerchannel mixes, including changes in the mix of software licenses in whichrevenue is recognized upfront as opposed to deferred over time and changes inthe mix of revenue attributable to higher-margin products as opposed tolower-margin sales or services;

·                                          Changesin demand for our products;

·                                          Fluctuationsor a decline in sales of servers due to changes in technology (such asvirtualization), economic conditions, or capital spending levels;

·                                          Changesin pricing policies or price reductions;

·                                          Changesin renewal rates for software upgrade protection or maintenance;

·                                          Competitionfrom new products and technologies and price reductions by competitors;

·                                          Theavailability and cost of supplies, components, or third party code or contenton commercially reasonable terms;

·                                          Compatibilityor interoperability of our products with third party systems and applications;

·                                          Salesand marketing expenses related to entering into new markets, introducing newproducts, new technologies, and retaining current OEM and other largecustomers;

·                                          Fluctuationsin foreign currency exchange rates and interest rates;

·                                          Theamount and timing of operating expenses and capital expenditures relating tothe expansion of our business and operations; and

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·                                          Costsassociated with legal proceedings, including legal fees and any adversejudgments or settlements.

Our operatingresults will continue to be affected by seasonal trends, by general conditionsin the IT market, and by general economic conditions.  We haveexperienced, and we expect to continue to experience, some degree ofseasonality due to customer buying cycles.  We believe that the third andfourth quarters will generally have higher net sales levels due to customerbudgeting and procurement cycles, which may depress net sales in otherquarters.  In addition, European sales are often weaker during the summermonths.  In the past, revenue in our fourth quarter of each year hastypically been higher than revenue in prior quarters for the year, and wetypically see a sequential decline in revenue from the fourth quarter of a yearto the first quarter of the following year.  While it is difficult topredict revenue in any quarter, we expect that this pattern will continue inthe future.  Many of the factors that create and affect seasonal trendsare beyond our control.

Our quarterlysales have also reflected a pattern in which a disproportionate percentage ofeach quarter’s total sales occur toward the end of the quarter, and this trendhas become more pronounced in recent periods. Our acquisition of LANDesk continues this trend with a greaterproportion of our software revenue coming from software license andsubscriptions booked in the last weeks or days of each quarter.  Thisuneven sales pattern makes prediction of revenue, earnings, and working capitalfor each financial period difficult, increases the risk of unanticipatedvariations in quarterly results and financial condition, and places pressure onour hardware inventory management and logistics systems.  If predicteddemand for hardware is substantially greater than orders, there will be excessinventory.  Alternatively, if hardware orders substantially exceedpredicted demand, we may not be able to fulfill all of the orders received inthe last few weeks of each quarter.  Other developments late in a quarter,such as a systems failure, component pricing movements, actions orannouncements from our competitors, global logistics disruptions, or largesales opportunities not being completed when predicted, could adversely impactinventory levels and results of operations in a manner that is disproportionateto the number of days in the quarter affected. In addition, accounting requirements associated with satisfying thevarious elements necessary to recognize software revenue may result insignificant fluctuations in our quarterly results.

In order to remaincompetitive and provide our increasingly sophisticated customers with moreoptions, we have made and expect to continue to make new software purchasingand licensing options available to our customers.  These options may result in an increase incontracts where software revenue is deferred or cash is received over time asopposed to recognition of revenue or payment at or about the time of thepurchase or license.

We believe thatquarter-to-quarter comparisons of our historical financial results are notmeaningful indicators of our future operating results, and you should not relyon them as an indication of our future performance.  If our quarterlyoperating results fail to meet the expectations of equity research analysts,the price of our common stock could be negatively affected.

**Ourgross margins are expected to vary and may decline.**

Gross margins mayvary or decline from period-to-period depending on a number of factors,including:

·                                          Theratio of OEM sales to branded sales, since OEM sales typically have lower grossmargins than branded sales;

·                                          Theratio of sales through indirect channels to direct sales, since indirect salestypically have lower gross margins than direct sales;

·                                          Productmix, because sales of some of our products and technologies will have lowergross margins than sales of other products or technologies (e.g. our softwareproducts tend to have higher gross margins);

·                                          Rawmaterials, freight, and labor costs;

·                                          Introductionof new products, services, and technologies by us and by our competitors; and

·                                          Thelevel of outsourcing of our manufacturing and assembly services for ourhardware products.

We expect that ourgross margins may vary and may decline in the future primarily due to thefactors listed above and to increased competition and the introduction of newproducts and technologies that may affect product prices and demand for ourproducts.

**Asubstantial portion of our business consists of sales to a limited number ofOEM customers that are not obligated to continue doing business with us, andthese sales vary considerably from quarter to quarter.**

A substantialportion of our sales is concentrated among a limited number of OEMcustomers.  Sales to these 

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OEMs representedapproximately 40% of net sales in 2006, 48% of net sales in 2005, and 45% ofnet sales in 2004.  Sales to Hewlett-Packard represented approximately 14%of our net sales in 2006, 20% of our net sales in 2005, and 23% of our netsales in 2004.  Sales to Dell represent approximately 14% of net sales in2006, 15% of our net sales in 2005, and 12% of our net sales in 2004.

We haveexperienced, and we expect to continue to experience, period-to-period variabilityin sales to these OEM customers.  Any cancellation, rescheduling, orreduction of orders by OEM customers in the future could materially adverselyaffect our operating results.  Although our OEM customers typically placeorders for products up to several months prior to scheduled shipment dates,these orders are subject to cancellation.

Our OEM businessis subject to many risks, including:

·                                          Contracttermination or reduced or delayed orders;

·                                          Shortorder cycles and difficulty in predicting sales because our OEM customers donot have long-term commitments to purchase from us;

·                                          Changesin the OEMs’ internal product life cycles including the delay of planned newproduct introductions and uncertainty over product end-of-life decisions;

·                                          Adoptionof competing products or technologies developed by third parties for the OEMs,acquisition or internal development of competing products or technologies bythe OEMs, or changes in the OEMs’ marketing of competing products or reducedmarketing of our products;

·                                          Changesin corporate ownership, financial condition, business direction, salescompensation related to our products, or product mix by the OEMs: and

·                                          Fluctuationsor a decline in sales of servers due to changes in technology (such asvirtualization), economic conditions, or capital spending levels.

Any of these riskscould have a material adverse effect on our business, financial condition, andresults of operations.  We have experienced, and expect to continue toexperience, pricing pressures and significant variability in orders from ourOEM customers, which may in the future have a material adverse effect on ourquarterly sales and operating results.

The loss of one ormore large OEM customers would materially harm our business.  While wehave contracts with some of our existing OEM customers, none of our OEMcustomers is obligated to purchase products from us except pursuant to bindingpurchase orders.  Consequently, any OEM customer could cease doingbusiness with us at any time.  Our dependence upon a few OEMs alsoresults in a significant concentration of credit risk, thus a substantialportion of our trade receivables outstanding from time to time may beconcentrated among a limited number of customers.  In addition, OEMcustomers have longer payment cycles that increase the likelihood of aged orproblem accounts receivable.

We use multiplewarehouses for many of our OEM customers to fulfill their hardware orders undera just-in-time inventory management system, which requires us to maintainsufficient inventory levels of our hardware products at each of thesewarehouses to satisfy our OEMs anticipated customer demand, and we generallyrecognize revenue only when these OEM customers take possession of our hardwareproducts.  We are required to plan production, order components, andundertake our manufacturing activities prior to the time that these ordersbecome firm or the products are accepted.  In addition, our OEM customershave requested, and are likely to continue to request from time to time, thatwe delay shipment dates or cancel orders for hardware products that are subjectto firm orders.  As a result, at any time we may be holding a significantamount of OEM-branded hardware products in inventory, and our sales toOEMs for future quarters are difficult to predict.  The inability toaccurately predict the timing and volume of hardware orders for our OEMcustomers during any given quarter could adversely affect operating results forthat quarter and, potentially, for future quarters.  If we underestimatesales, we may not be able to fill orders on a timely basis.  This couldcause customer dissatisfaction and loss of future business.  If weoverestimate sales, we may experience increased costs from inventory storage,waste, and obsolescence.

**Asubstantial portion of our business consists of sales to a limited number ofresellers and distributors that are not obligated to continue doing businesswith us, and these sales vary considerably from quarter to quarter.**

Asubstantial portion of our sales consists of sales of our branded products to alimited number of resellers and distributors.  Sales to resellers anddistributors represented approximately 56% of net sales in 2006, 48% ofnet sales in 2005, and 52% of net sales in 2004.  The loss of significantrevenue opportunities with these resellers and distributors could negativelyimpact our results of operations.  Inaddition, many of these customers also have or distribute competing products.  If resellers and distributors elect to 

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increase the marketing ofcompeting products or reduced marketing of our products, our ability to growour business will be negatively impacted and will impair one of our substantialrevenue sources.

Our reseller anddistributor business is subject to many risks, including:

·                                          Concentrationof business in a limited number of resellers and distributors could result insignificant damage to our business upon the termination of our resellerrelationship;

·                                          Terminationof our reseller and distributor agreements or reduced or delayed orders;

·                                          Difficultyin predicting sales to reseller and distributors who do not have long-termcommitments to purchase from us, which requires us to maintain sufficientinventory levels to satisfy anticipated demand;

·                                          Lackof visibility of end user customers and revenue recognition and channelinventory issues related to sales by resellers and distributors;

·                                          Resellersand distributors electing to resale or increase their marketing of competingproducts or technologies or reduced marketing of our products; and

·                                          Changesin corporate ownership, financial condition, business direction, salescompensation related to our products, or product mix by the resellers anddistributors.

Any of these riskscould have a material adverse effect on our business, financial condition, andresults of operations.  We have experienced, and expect to continue toexperience, pricing pressures and significant variability in orders from ourresellers and distributors, which may in the future have a material adverseeffect on our quarterly sales and operating results.

The loss of one ormore large reseller and distributors could materially harm our business. While we have reseller and distributor agreements, none of our resellers ordistributors are obligated to purchase products from us.  Consequently,any reseller or distributor could cease doing business with us at anytime.  Our dependence upon a few resellers and  distributors could result in a significantconcentration of credit risk, thus a substantial portion of our trade receivablesoutstanding from time to time may be concentrated among a limited number ofcustomers.  In addition, the inability to accurately forecast the timingand volume of orders for sales of branded products to resellers anddistributors during any given quarter could adversely affect operating resultsfor such quarter and, potentially, for future periods.  If weunderestimate sales, we will not be able to fill orders on a timelybasis.  This could cause customer dissatisfaction and loss of future business. If we overestimate sales, we will experience increased costs from inventorystorage, waste, and obsolescence.

**We willneed to expand sales through distributors and resellers in order to develop ourbusiness and increase revenue.**

We rely ondistributors and resellers, VARs (including LANDesk VARs who are also referredto as “Expert Service Providers” or “ESPs”), and systems integrators for thedistribution and sale of our branded hardware and software products.  Ourstrategy contemplates the expansion of our distributor and reseller networkboth domestically and internationally, particularly in Asia, and an increase inthe number of customers licensing our products through these expanded channels. Our future success will depend in part on our ability to attract, train,and motivate new distributors and resellers and expand our relationships withcurrent distributors and resellers.  We may not be successful in expandingour distributor and reseller relationships.  We will be required to investsignificant additional resources in order to expand these relationships, andthe cost of this investment may exceed the margins generated from thisinvestment.  Conducting business throughindirect sales channels presents a number of risks, including:

·                                          Difficultiesin replacing any lost or terminated distributors or resellers;

·                                          Existingor new distributors and resellers may not be able to effectively sell ourcurrent or future products or services;

·                                          Potentialdistributors and resellers deciding not to enter into relationships with usbecause of our existing relationships with other distributors and resellerswith which they compete;

·                                          Ourability to provide proper training and technical support to our distributorsand resellers;

·                                          Distributorsand resellers electing to place greater emphasis on products or servicesoffered by our competitors; and

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·                                          Thelack of direct control over the business practices, marketing, sales andservices offered by distributors and resellers;

As we expand ourdistribution and reseller channels, we will also need to expand our salesorganization and invest substantial resources toward this expansion.  We may experience difficulty recruiting,training, and retaining qualified sales personnel, and any failure to obtain,train, and keep qualified personnel could limit our ability to sell products.

In addition,distributors and resellers of our hardware products often have rights ofreturn, and in the future, these returns from our existing or any newdistributors and resellers may have a material adverse effect on our business,financial condition, and results of operations.  Our agreements with ourcurrent distributors and resellers are generally nonexclusive and may beterminated on short notice by either party without cause, and any new distributoror reseller agreements are likely to contain similar provisions. Distributors and resellers are not obligated to purchase products from us andfrequently offer products from several different companies, includingcompetitors’ products, and distributors and resellers may give higher priorityto the sale of our competitors’ products.  A reduction in sales efforts orefficiency by our distributors or resellers could lead to a reduction in oursales and could materially adversely affect our business, financial condition,and results of operations.

**We aredependent upon third party suppliers and outsourced manufacturing for ourhardware products.  Disruption of our access to these supplies andservices, or problems with the quality of supplies or services, could preventus from filling customer orders and harm our business.**

The principalcomponents of our hardware products are electronic components, power supplies,semiconductors, memory, cable assemblies, line filters, enclosures, and printedcircuit boards, all of which are purchased from outside vendors.  Wegenerally buy components under purchase orders and generally do not havelong-term agreements with our suppliers.  Also, we generally do notmaintain large inventories of components.  Any termination of, orsignificant disruption of, our relationships with the suppliers of our productcomponents may prevent us from filling customer orders in a timely manner whichcould result in customer dissatisfaction and lost sales.

We haveoccasionally experienced, and we may in the future experience, shortages ordelays in delivery of components.  Although alternate suppliers areavailable for most of the components and services needed to produce ourproducts, the number of suppliers of some components is limited, and qualifyinga replacement supplier and receiving components from alternate suppliers couldtake several months.

We have limitedability to control quality issues (particularly with respect to faultycomponents manufactured by third parties), and we depend upon suppliers todeliver components that are free from defects, competitive in functionality andcost, and in compliance with specifications and delivery schedules. Disruption in supply, a significant increase in the cost of one or more components,failure of a third party supplier to remain competitive in functionality orprice, or the failure of a supplier to comply with any of our procurement needscould delay or interrupt our ability to manufacture and deliver our products tocustomers on a timely basis, thereby delaying our revenue recognition andadversely affecting our business, financial condition, and results ofoperations.

We rely on thirdparty manufacturers for subassembly of products and for final assembly, qualityassurance, and testing of some of our products.  These outsourcingarrangements and any future outsourcing arrangements involve numerous risks,including the economic and financial viability of these manufacturers, reducedcontrol over product quality, delivery schedules, manufacturing yields, andcosts.  Moreover, although arrangements with such manufacturers maycontain provisions for warranty obligations on the part of such manufacturers,we are primarily responsible to our customers for warranty obligations.

**Ourhardware products are subject to warranty claims and returns.  Increasedwarranty claims or returns could harm our business.**

We typically offera thirty day unconditional money-back guarantee on our appliance products soldin North America.  We also offer warranties for parts and service on allour hardware products, ranging from one to three years (and, in the case ofsome of our Equinox branded products, five years).  Although ourhistorical return experience has not been significant, our returns may increasein the future.  An increase in returns would have an adverse effect on oursales and could negatively affect our financial results.

For our softwareproducts, sales are final and we do not generally allow any returns.  We provide a ninety day warranty on the mediaused to deliver the software, which is not applicable to electronic downloads,and we often provide a limited warranty (usually no more than ninety days) thatour products will function in accordance with the user documentation.

In the future, wemay, as a result of competitive pressures or customer demands, change ourwarranty policies or our warranty 

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terms to provide coveragethat is greater in scope and duration than the coverage we currentlyoffer.  If we were to increase our warranty coverage, our risk of warrantyclaims, and therefore our warranty expense and reserves, would likely increase.

**We mustmeet the increased demands on customer service operations or customersatisfaction and sales could suffer.**

Continued growthof our sales is likely to be accompanied by increasing demands on customerservice operations.  As a result of our commitment to a high level ofcustomer service, we will need to invest significant resources in themaintenance and improvement of our customer service resources.  Any failureto maintain adequate customer service could cause customer dissatisfaction,result in reduced sales of products and, accordingly, materially adverselyaffect our business, financial condition, and results of operations.

**If weare unable to successfully develop our international distribution and resellernetworks and international sales efforts, results of operations may suffer.**

We are working todevelop, integrate, and expand our international distribution and resellernetworks in an effort to increase international sales of switching, extension,remote access, systems management and security software, and otherproducts.  We may not be successful in developing or expanding theinternational distribution and reseller network or in marketing and sellingproducts in foreign markets, particularly Asia.  If the revenue generatedby our international sales is not adequate to recover the expense ofestablishing, expanding, and maintaining an international distribution andreseller network, our business, financial condition, and results of operationscould be materially adversely affected.  If international sales become amore significant component of net sales, our business could become morevulnerable to the risks inherent in doing business on an international level,including:

·                                          Difficultiesin managing foreign distributors and resellers;

·                                          Longerpayment cycles and problems in collecting accounts receivable;

·                                          Theeffects of seasonal customer demand;

·                                          Changesin regulatory requirements;

·                                          Difficultiesin meeting the requirements of different international product regulations,including import and export requirements;

·                                          Risksrelating to the protection of our intellectual property rights;

·                                          Theimpact on our marketing expenses and our research and development resources aswe localize our product offerings to meet local user requirements such aslanguage translations and hardware compatibility issues;

·                                          Exportrestrictions, tariffs, and other trade barriers;

·                                          Fluctuationsin currency exchange rates; and

·                                          Potentiallyadverse tax consequences and political instability.

The existence oroccurrence of any one of these factors could have a material adverse effect onour business, financial condition, and results of operations.

**Due tothe international nature of our business, political or economic changes orother factors could harm our future revenue, increase our costs and expenses,and impair our financial condition.**

We are a globalcompany with sales, manufacturing, and research and development efforts aroundthe world.  Sales outside the UnitedStates generate approximately half of our revenue, over half of ourmanufacturing takes place outside the United States, and we have research anddevelopment centers in several locations outside the United States.  Accordingly,our business, operating results, future revenue, gross margin, expenses, andfinancial condition could suffer due to a variety of international factors,including:

·                                          Ongoinginstability or changes in a country’s or region’s economic or political conditions,including inflation, recession, interest rate fluctuations, and actual oranticipated military or political conflicts, particularly in areas where wehave offices or other facilities;

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·                                          Currencyfluctuations, which could contribute to variations in sales of products andtechnologies and could also affect our reported results expressed in U.S.dollars;

·                                          Longeraccounts receivable cycles and financial instability among customers;

·                                          Taxor trade regulations, tariffs, duties, and procedures and actions affectingproduction, pricing, and marketing of or payments for products;

·                                          Locallabor conditions and other regulations;

·                                          Differingtechnology standards or customer requirements;

·                                          Limitedor unfavorable intellectual property protection in certain foreign countriesincluding the loss of proprietary information due to piracy ormisappropriation;

·                                          Fluctuationsin freight costs and disruptions at important geographic points of exit andentry;

·                                          Naturalor manmade disasters, such as earthquakes, tsunamis, hurricanes, typhoons,fires, power shortages, blackouts, or telecommunications failures;

·                                          Medicalepidemics, such as avian flu or Severe Acute Respiratory Syndrome (SARS);

·                                          Seasonalreductions in business activity in certain foreign countries, such as thesummer months in Europe;

·                                          Compliancewith a wide variety of complex laws, treaties, and regulations that increasethe risks of doing business in certain foreign countries;

·                                          Restrictionsagainst repatriation of earnings from our international operations;

·                                          Difficultiesin staffing and managing international operations, including the difficulty inmanaging a geographically dispersed workforce;

·                                          Possiblenon-compliance with our Code of Conduct or other corporate policies due toinconsistent laws, interpretations, and/or application of corporate standardsin foreign countries;

·                                          Increasedfinancial accounting and reporting burdens and complexities; and

·                                          Theneed to localize our products.

The factorsdescribed above also could disrupt our product development and manufacturing,key suppliers, and OEMs and resellers located outside of the United States. For example, we rely on manufacturers in Asia and Europe for the assemblyand manufacture of many of our hardware products, and we conduct substantialsoftware development and testing operations in China.  Accordingly, we are directly affected byeconomic, political, and military conditions in China.  Any interruption or curtailment of tradebetween China and its present trading partners could materially adverselyaffect our product development, product releases, support, business, operatingresults, and financial condition.

Continued orincreased international political instability, evidenced by the threat oroccurrence of terrorist attacks, enhanced national security measures in theUnited States, sustained military action or other conflicts, or strainedinternational relations may impair our ability to do business, increase ourcosts and adversely affect our stock price. Increased international instability may negatively impact our ability toobtain adequate insurance at reasonable rates or require us to take extrasecurity precautions for our domestic and international operations.

**Fluctuationsin the value of foreign currencies could result in currency exchange losses.**

Currently, amajority of our international business is conducted in U.S. dollars. However, as we expand our international operations, it is likely thatinternational business will increasingly be conducted in foreigncurrencies.  In particular, the introduction of the euro has led many ofour European customers to request or insist that our sales to them bedenominated in euros instead of U.S. dollars and sales from our softwareoperations are frequently conducted in foreign currencies.  Fluctuations in the value of foreign 

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currencies relative tothe U.S. dollar have caused, and are expected to increasingly cause, currencytransaction gains and losses.  In addition, currency fluctuations couldalso affect our reported results expressed in U.S. dollars.  While we attempt to hedge our foreigncurrency exposure, we cannot predict the effect of exchange rate fluctuationsupon future quarterly and annual operating results, and we may experiencecurrency losses in the future.

**Thesales cycle for our software products is unpredictable, making it difficult toforecast operating results for any given period.**

The sales cyclefor our software products is typically ninety to one hundred eighty days orlonger.  This sales cycle is subject to anumber of significant risks over which we have little or no control, including:

·                                          Customers’budgetary constraints, internal acceptance requirements, and procurementprocedures;

·                                          Concernsabout the actions or announcements of our competitors and their products;

·                                          Concernsabout the future or performance of our company; and

·                                          Changesin economic conditions generally and in the technology market specifically.

For largeopportunities, especially for enterprise-wide sales, the sales cycle is oftensignificantly longer than our average sales cycle.  In addition, these large opportunities aremore difficult to forecast, and if we do not correctly forecast the timing in agiven period, the amount of revenue we recognize in a period could be lowerthan we expect, which could negatively affect our operating results for thethen current period and future periods over which revenue would have beenrecognized.  In addition, the terms andconditions of the legal agreements for these large opportunities are oftenbased on our customers’ purchase agreements and may contain terms that aregenerally less favorable to us than our standard terms and conditions. As aresult, revenue recognition may be delayed.

**Oursoftware revenue is dependent on sales to existing customers or the renewal ofannual software upgrade protection or maintenance services by existingcustomers.**

Our LANDeskDivision has historically derived, and plans to continue to derive, asignificant portion of our total software revenue from existing customers whopurchase additional products or annual maintenance or upgrade protection.  We depend on our installed base of softwarecustomers for future revenue from the purchase of annual software upgradeprotection or maintenance services.  Aswe introduce new software products, our current customers may not require ordesire the functionality of our new products and may choose not to licensethese products or renew their agreements for maintenance or upgradeprotection.  If our customers do notpurchase additional products or increased numbers of products already in use,or renew annual software upgrade protection or maintenance services, ourability to increase or maintain revenue levels could be limited to only newcustomers.

Maintenancerevenue related to the licensing of our software products is a significant partof our current and future operating revenue. In general, maintenance fees increase with the increase in the use ofour software.  Accordingly, we receivehigher maintenance fees with new license agreements and as existing customersinstall more of our software products on additional systems.  Due to increased discounting for larger salesopportunities, maintenance fees on a per unit basis for such large deals can belower than average.  In addition,customers are generally provided reduced annual maintenance percentages forentering into long-term maintenance agreements. Declines in our license bookings, increases in long-term maintenanceagreements, customers electing to migrate to competitive products or findalternatives to our products, and/or increased discounting could lead toreduced software maintenance revenue and reduced gross margins.

**Oursoftware products are designed with interoperability or compatibility with manythird party platforms, systems, and applications, the absence of which may harmour business.**

Our softwareproducts are designed for use with specific third party platforms, systems, andapplications.  We believe the breadth ofour integration with such platforms, systems and applications is a significantcompetitive advantage.  Any significantchange in these third party products could result in the loss ofinteroperability or compatibility with our products, making our products lessattractive, increasing our research and development costs in order to modifyour products, license new solutions, or develop new products, and potentiallyharming our future revenue.  Our failureto anticipate, manage and adapt to these risks could result in significantdelays in our product releases, changes in our product roadmaps, loss ofcurrent customers for whom the lost compatibility is an issue, and damage toour operating results.

**Oursoftware products include third party content or code upon which we rely forthe interoperability, integration,**

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**development,or updates of our products, and disruption of our access to such code orcontent could delay product releases, inhibit our compatibility with thirdparty products, and harm our business.**

The principalcomponents of our software products are proprietary code and content.  We do, however, rely on some third party codeor content, and we expect to use such third party code or content in futureproducts. Although we believe that there are adequate alternative sources for thetechnology licensed to us, any significant interruption in the availability ofthese third party software products on commercially acceptable terms or anydefects in these products could delay development of future products orenhancement of our future products and harm our revenue.  Use of such third party code or contentpresents risks such as:

·                                          Ownersor licensees of third party systems could adopt more restrictive policies orimpose unfavorable terms and conditions for access to their products making itmore difficult for us to make our products compatible with their products andresulting in higher research and development costs for us for the enhancementor modification of our existing products and the development of new products;

·                                          Functionalityprovided by third party code or content in our products may become obsolete,defective, or incompatible with future versions of our products, may not beadequately maintained or updated, and we may be unable to find viablealternatives or develop our own proprietary solution;

·                                          Quality,warranty, and support terms vary dramatically when licensing third party codeand content, and we have limited ability to control quality issues with thirdparty code and content and we must depend on our own research and developmentpersonnel to evaluate and select third party code that we believe is of themost value to our customers; and

·                                          Technicaldifficulties in integrating our products and third party code or content tocreate a combined solution, and the risk that customers will not perceive theneed for such integrated solutions.

Any significanttermination of a third party license, change in third party license provisions,increase in the cost of such third-party code or content, failure of a code orcontent provider to remain competitive in functionality, or defect in orquality issue with third party code could delay or interrupt our ability todevelop and deliver software products to customers on a timely basis.  This could delay our revenue recognition andadversely affect our business, financial condition, and results of operationsand possibly expose us to claims under license agreements with ourcustomers.  Our failure to anticipate,manage, and adapt to these risks could result in significant delays in our productsreleases, changes in our product roadmaps, and damage to our operating results.

**Softwareerrors or bugs, and possible product liability claims related to such errors orbugs, could result in increased costs, damage to our reputation, and loss ofmarket share.**

Our softwareproducts are generally large and intricate programs.  As a result, our current software products,updates, upgrades or future products may contain errors, failures, or “bugs,”some of which may not become known until after the product has been released byus for use by customers.  While weroutinely test our products for such errors and identify and correct bugsthrough our customer support group, these problems are inevitable.  Any significant errors may result in, amongother things, loss of, or delay in, the market acceptance or our products, lostrevenue and sales of our products, reallocation of, or increases in,development and customer support resources, impairment to our reputation, lossof future renewal or maintenance revenue, and increased service and warranty costs.  Errors could also result in significantdelays in the release of updates, upgrades, or new products while such errorsare corrected.  Moreover, because ourproducts primarily support other systems and applications, any software errorsor bugs in these other systems or applications may affect the performance ofour software, and it may be difficult or impossible to determine where theerrors reside.  As a result, producterrors, failures, or bugs could result in significant harm to our business andhave a material adverse effect on our results of operations.

We may be subjectto legal actions or claims for damages related to product errors which could,whether or not successful, increase costs and distract our management and ourdevelopment and support teams and could harm our business, result in unexpectedexpenses and damage our reputation.  Ourlicense agreements with our customers typically contain provisions designed tolimit exposure to potential product liability claims, and our standardagreements in many jurisdictions also provide that we will not be liable forindirect or consequential damages caused by the failure of our products.  In certain jurisdictions, however, warrantyand limitation of liability provisions are not effective.

**Use ofopen source software or technology in our products may reduce our ability tocontrol the quality and support for products and may result in damage to ouroperating results.**

“Open source”software is software that is made widely available by its authors or other thirdparties and is often licensed on 

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an “as is” for a nominalfee or, in some cases, at no charge.  Wehave incorporated some open source software into our products, allowing us toenhance certain solutions without incurring substantial additional research anddevelopment costs. While we have not experienced any material problems as aresult of our use of open source software, use of open source software entailssignificant risks including:

·                                          Opensource software or technology becoming competitive with our proprietarytechnology, which could cause sales of our products to decline or force us toreduce the fees we charge for our products, which could have a material adverseimpact on our revenue and operating margins;

·                                          Requiringthat we make available the source code for any modifications or derivativeworks we make to or from the open source software, and that we license orcontribute such modifications or derivative works under the terms of aparticular open source license or other license granting third parties certainrights of further use;

·                                          Ourproprietary software could be combined with open source software in such a waythat we would be required to release the source code of our proprietarysoftware; and

·                                          Thelack of any warranty, maintenance, or support for most open source software ortechnology.

We haveestablished processes to help minimize these risks to the extent within ourcontrol, including a review process for screening requests from our developmentorganizations for the use of open source, but we cannot be sure that all opensource software or technology is submitted for approval prior to use in ourproducts or that all use is in compliance with our corporate policies. Theserisks, if not eliminated, could negatively affect our business.

**Executiveofficers and other key personnel may depart, which could adversely affect ourresults of operations and harm our ability to grow the business.**

We are greatlydependent on the ability to retain key management, sales, and technicalpersonnel, and our future success is highly dependent upon the personal effortsof our management, sales, and technical personnel and other keyemployees.  The loss of services of key personnel, including those whorecently joined us a result of the Cyclades and LANDesk acquisitions, couldhave a material adverse effect on our business, financial condition, andresults of operations.  We have attempted to mitigate these risks byoffering key Cyclades and LANDesk employees retention bonuses (payable only ifthey continue employment with us for specified periods) and equity awards, butthere is the risk that we could nevertheless lose key management, sales, andtechnical employees.

We havehistorically used stock options and are currently using restricted stock unitsas a key component in our executive and employee compensation programs in orderto align employees’ interests with the interests of our stockholders, encourageemployee retention, and provide competitive compensation packages.  Manyof our employee stock options are fully vested.  This could affect ourability to retain present employees.  In addition, we are now required torecord a charge to earnings for employee stock option grants and other equityincentives.  Moreover, applicable stock exchange listing standardsrelating to obtaining stockholder approval of equity compensation plans couldmake it more difficult or expensive for us to grant options to employees in thefuture.  As a result, we may incur increased compensation costs, changeour equity compensation strategy, or find it difficult to attract, retain, andmotivate employees, any of which could materially adversely affect ourbusiness.

As we expand ourinternational operations, we will be required to recruit and retain experiencedmanagement, sales and technical personnel in our international offices, and weexpect that the identification, recruitment, training and retention of suchpersonnel will require significant management time and effort andresources.  Competition for employeeswith the skills required, particularly engineering and other technicalpersonnel, is intense, and there can be no assurance that we will be able toattract and retain highly skilled employees in sufficient numbers to sustainour current business or to support future growth.  We may need to payrecruiting or agency fees and offer additional compensation or incentives toattract and retain these and other employees, resulting in an increase to ouroperating expenses.

**Difficultiesencountered during changing economic conditions could adversely affect ourresults of operations.**

For the lastseveral years, we have experienced rapid revenue and customer growth andexpansion in the number of employees, product offerings, customers, operatinglocations, and suppliers.  In addition, we have acquired a number ofcompanies in the same time period.  This growth and these acquisitionshave resulted in increased responsibilities and placed significant strain onour managerial, operational, and financial resources and resulted in new andincreased responsibilities for management personnel.  There can be noassurance that our management, personnel, systems, procedures, and controlsare, or will be, adequate to support our existing and future operations or thatwe will continue to grow.  If we fail torecruit and retain sufficient and qualified managerial, operational, orfinancial personnel or to implement or maintain internal systems that enable usto effectively manage our growing

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business and operationsworldwide, our financial results in any given period may be adversely affectedand our business and financial condition could be materially harmed.

Our ability toeffectively manage during changing economic conditions will require us tocontinue to implement and improve our operational, financial, and informationsystems and internal controls and will likely require additional managementpersonnel.  In addition, we believe that we must continue to developgreater engineering, financial, marketing, sales, and customer servicecapabilities in order to develop new products and technologies, secure newcustomers, and effectively serve the evolving needs of present and futurecustomers.  We may not be successful in strengthening these capabilities. Without adequate management, engineering, financial, product development,marketing, sales, and customer service capabilities, our ability to effectivelymanage during changing economic conditions, expand and enhance our productlines, further penetrate existing markets, and develop new markets will besignificantly limited.  If we are unable to effectively manage duringchanging economic conditions, our business, financial condition, and results ofoperations could be materially adversely affected.

Because ourbusiness and operating results depend to a significant extent on the generalconditions in the server market, any adverse change in the server market due toadverse economic conditions, declining capital spending levels, or otherfactors could have a material adverse effect on our business, financialcondition, and results of operations.  In addition, we continue to seeindustry-wide initiatives by OEMs and by distributors and resellers of ourhardware products to reduce their inventories and to shorten their lead times,thereby reducing early commitments to firm orders by our major OEM and ourdistributor and reseller customers.

**Our line of credit couldadversely affect us and our operations.**

In the secondquarter of 2006, we obtained a $250,000,000 unsecured, five-year, revolving,bank line of credit, and we used borrowings under this line of credit to fund aportion of the LANDesk acquisition and the purchase of our shares under ourstock repurchase program.  Interestexpense on borrowings and additional future borrowings under the line of creditcould adversely affect our future net income, margins, expenses, and financialconditions by:

·                                          Requiringus to dedicate a substantial portion of our cash flow from operations topayments on our indebtedness, which would reduce the availability of our cashflow to fund internal growth through working capital and capital expendituresand for other general corporate purposes;

·              Increasing our vulnerability toeconomic downturns in our industry;

·                                          Increasingour vulnerability to interest rate increases to the extent any of our variablerate debt is not hedged;

·                                          Placingus at a competitive disadvantage compared to our competitors that have lessdebt in relation to cash flow;

·                                          Limitingour flexibility in planning for or reacting to changes in our business and ourindustry;

·                                          Limiting,among other things, our ability to borrow additional funds, refinance the lineof credit, or obtain other financing capacity; and

·                                          Subjectingus to a risk of noncompliance with financial and other restrictive covenants inour indebtedness.

The lineof credit contains affirmative and negative covenants, including limitations onour ability to (i) make distributions, investments, and other paymentsunless we satisfy certain financial tests or other criteria, (ii) incuradditional indebtedness, and (iii) make acquisitions and capitalexpenditures.  All of these restrictionscould affect our ability to operate our business and may limit our ability totake advantage of potential business opportunities as they arise.  The failure to comply with these covenantscould result in an event of default which, if not cured or waived, could have amaterial adverse effect on us.

Our ability tocomply with these provisions of our line of credit may be affected by changesin the economic or business conditions or other events beyond our control.  If we do not comply with these covenants andrestrictions, we could be in default under our line of credit, and our debt,together with accrued interest, could then be declared immediately due andpayable.  There can be no assurance thatwe will be able to obtain sufficient funds to enable us to repay or refinanceour debt obligations on commercially reasonable terms or at all.  We also face interest rate risk on our bankline of credit which currently bears interest at a variable rate of LIBOR plus70 basis points.  We have partiallyhedged this exposure to interest rate risk with an interest rate swap, whichhas a remaining notional amount of $110 million, through a well establishedfinancial institution.

**Unanticipatedchanges in our tax rates or exposure to additional income tax liabilities couldaffect our profitability.**

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We are subject toincome taxes in both the United States and various foreign jurisdictions, andour domestic and international tax liabilities are subject to the allocation ofexpenses in different jurisdictions.  Our effective tax rates could beadversely affected by changes in the mix of earnings in countries withdiffering statutory tax rates, in the valuation of deferred tax assets andliabilities, in tax laws, or by material audit assessments, which could affectour profitability.  In addition, the amount of income taxes we pay issubject to audit in various jurisdictions, and a material assessment by agoverning tax authority could affect our profitability.

**Failureto maintain adequate internal systems and effective internal controls over ourfinancial reporting and information systems could result in our management andauditors being unable to certify the effectiveness of our internal controlsover financial reporting and information systems, which could harm our businessreputation and cause our stock price to decline.**

Section 404 of theSarbanes-Oxley Act of 2002 requires that we implement and maintain adequateinternal systems and effective internal controls over financial reporting andinformation systems.  We have not yetcompleted our review and assessment of the internal systems and controls overthe LANDesk financial reporting and information systems, and we have untilDecember 31, 2007 to do so.  The absenceof such controls could have a material adverse effect on our business,financial condition, and results of operations. In addition, correction of any “significant deficiencies” or “materialweaknesses” (as defined under PCAOB guidelines) could require additionalremedial measures including hiring additional personnel which could be costlyand time-consuming.  If a significantdeficiency or material weakness exists as of a future period year-end(including a material weakness identified prior to year-end for which there isan insufficient period of time to evaluate and confirm the effectiveness of thecorrections or related new procedures), our management and our auditors will beunable to report favorably as to the effectiveness of our control overfinancial reporting or information systems. This could result in a loss of investor confidence in the accuracy andcompleteness of our financial reports and our management, which could result ina decline of our stock price, damage to our business reputation, and potentiallitigation.

**Changesin accounting standards or the interpretation of accounting standards,including changes related to revenue recognition, could cause significantimpact on our revenue or earnings.**

Based on ourinterpretation of current accounting standards, we believe we have properlyreported our current sales and license revenue. New accounting standards or regulations, changes to current accountingstandards, or different interpretations of existing accounting standards in thefuture could result in corresponding changes in our revenue recognition orother accounting policies that could have a material adverse effect on ourfinancial condition and operating results.

**Unforeseenenvironmental costs could negatively affect our future earnings.**

Some of ouroperations use substances regulated under various federal, state, andinternational laws governing the environment, including those governing thedischarge of pollutants into the air and water, the management and disposal ofhazardous substances and wastes, and the cleanup of contaminated sites. Many of our products are subject to various federal, state, and internationallaws governing chemical substances in products, including those regulating themanufacture and distribution of chemical substances and those restricting thepresence of certain substances in electronics products.  We could incursubstantial costs, including cleanup costs, fines, civil or criminal sanctions,third party property damage, or personal injury claims if we were to violate orbecome liable under environmental laws or if our products become non-compliantwith environmental laws.  We also face increasing complexity in our productdesign and procurement operations as we adjust to new and future requirementsrelating to the materials composition of our products, including therestrictions on lead and certain other substances that will apply to specifiedelectronics products put on the market in the European Union as of July 1,2006 (Restriction of Hazardous Substances Directive) and similar legislationcurrently proposed in China and other countries.  The ultimate costs underenvironmental laws and the timing of these costs are difficult to predict, andliability under some environmental laws relating to contaminated sites can beimposed retroactively and on a joint and several basis.

We could also facesignificant costs and liabilities in connection with product take-backlegislation.  The European Union has finalized the Waste Electrical andElectronic Equipment Directive (WEEE), which makes producers of electricalgoods, including computers and peripherals, financially responsible forspecified collection, recycling, treatment, and disposal of past and futurecovered products.  This deadline to enact and implement the directive byindividual European Union governments generally was August 13, 2004,although extensions were granted to some countries (such legislation, togetherwith the directive, the “WEEE Legislation”), and producers are financiallyresponsible under the WEEE Legislation beginning in August 2005. Similar legislation has been or may be enacted in other geographies, includingin the United States and Japan, the cumulative impact of which could besignificant for us.  We have incurred some costs and will continue toincur costs under the WEEE legislation but the amount and timing of these costsare difficult to predict.

**Provisionsin our charter documents and in Delaware law may discourage potentialacquisition bids for us and may prevent changes in management that stockholdersmay favor.**

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Provisions in ourcharter documents could discourage potential acquisition proposals and coulddelay or prevent a change in control transaction that stockholders mayfavor.  These provisions could have the effect of discouraging others frommaking tender offers for shares, and as a result, these provisions may preventthe market price of our common stock from reflecting the effects of actual orrumored takeover attempts and may prevent stockholders from reselling theirshares at or above the price at which they purchased their shares.  Theseprovisions may also prevent changes in management that stockholders mayfavor.  Our charter documents do not permit stockholders to act by writtenconsent, limit the ability of stockholders to call a stockholders meeting, andprovide for a classified board of directors, which means stockholders can onlyelect, or remove, a limited number of directors in any given year. Furthermore, our Board of Directors has the authority to issue up to fivemillion shares of preferred stock in one or more series.  The Board ofDirectors can fix the price, rights, preferences, privileges, and restrictionsof such preferred stock without any further vote or action by ourstockholders.  The issuance of shares of preferred stock may delay orprevent a change in control transaction without further action by ourstockholders.

In addition,Delaware law may inhibit potential acquisition bids for us.  Delaware lawprevents certain Delaware corporations, including Avocent, from engaging, undercertain circumstances, in a business combination with any interestedstockholder for three years following the date that such stockholder became aninterested stockholder.

**Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds.**

In 2004, our Boardof Directors approved a stock repurchase program whereby we may purchase sharesof our common stock.  Our Board hasapproved a total of 12.0 million shares to be repurchased under this program,including 2.0 million additional shares approved by our Board in February2007.  The plan has no expirationdate.  Details of purchases made duringthe first six months of 2007 are as follows:
| **Period:**                                | ** ** | **Total Number of  Shares Purchased   During the Period** | ** ** | **Average Price Paid  Per Share for Period  Presented** | ** ** | **Total Cumulative   Number of  Shares Purchased as  Part of Publicly  Announced Plan** | ** ** | **Maximum   Number of  Shares   Remaining to  Purchase Under   the  Plan** | ** ** |
|--------------------------------------------|------------|-----------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|
|                                       |       |                                                                                    |       |                                                                             |       |                                                                                                                            |       |                                                                                                     |       |
| January 1, 2007  — January 26, 2007   |       | —                                                                                  |       | $                                                                                | —     |                                                                                                                            | 9,813,733  |                                                                                                     | 186,267    |   |
| January 27, 2007  — February 23, 2007 |       | 186,267                                                                                 |       | $                                                                                | 35.03      |                                                                                                                            | 10,000,000 |                                                                                                     | 2,000,000  |   |
| February 24,  2007 — March 30, 2007   |       | 300,000                                                                                 |       | $                                                                                | 29.71      |                                                                                                                            | 10,300,000 |                                                                                                     | 1,700,000  |   |
| Quarter ended  March 30, 2007              |       | 486,267                                                                                 |       | $                                                                                | 31.75      |                                                                                                                            |       |                                                                                                     |       |   |
|                                       |       |                                                                                    |       |                                                                             |       |                                                                                                                            |       |                                                                                                     |       |
| March 31, 2007 —  April 27, 2007      |       | 100,000                                                                                 |       | $                                                                                | 24.93      |                                                                                                                            | 10,400,000 |                                                                                                     | 1,600,000  |   |
| April 28, 2007 —  May 25, 2007        |       | —                                                                                  |       | $                                                                                | —     |                                                                                                                            | 10,400,000 |                                                                                                     | 1,600,000  |   |
| May 26, 2007 —  June 29, 2007         |       | —                                                                                  |       | $                                                                                | —     |                                                                                                                            | 10,400,000 |                                                                                                     | 1,600,000  |   |
| Quarter ended June  29, 2007               |       | 100,000                                                                                 |       | $                                                                                | 24.93      |                                                                                                                            |       |                                                                                                     |       |   |
| Six months ended  June 29, 2007            |       | 586,267                                                                                 |       | $                                                                                | 30.58      |                                                                                                                            |       |                                                                                                     |       |   |

 

Approximately 104,000 shares were withheld as payment for employeepayroll withholding taxes at the release of vested restricted stock units inthe first six months of 2007 (*see note 3 tothe financial statements*). The 104,000 shares were considered as treasury shares; however, thesetreasury shares were considered immediately retired and are not considered inthe table above.

**Item 6.    Exhibits.**

(a) Exhibits

**31.1**        Sarbanes-Oxley Act of 2002 Section 302(a) Certification of the ChiefExecutive Officer

**31.2**        Sarbanes-Oxley Act of 2002 Section 302(a) Certification of the Chief FinancialOfficer

32.1         Certification of the Chief Executive Officer and the Chief Financial Officerpursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of theSarbanes-Oxley Act of 2002.

ITEMS 3, 4, AND 5 ARE NOTAPPLICABLE AND HAVE BEEN OMITTED.

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### **SIGNATURE**

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.
|        |   |           |   | AVOCENT CORPORATION                                             |   |   |   |
|--------|--------|----------------|--------|-----------------------------------------------------------------|--------|--------|--------|
|   |   |           |   | (Registrant)                                                    |   |   |
|   |   |           |   |                                                            |   |   |
|   |   |           |   |                                                            |   |   |
| Date:  |   | August 6, 2007 |   | /s/ Edward H. Blankenship                                       |   |   |   |
|   |   |           |   | Edward H. Blankenship                                           |   |   |
|   |   |           |   | Senior Vice President of Finance, Chief Financial               |   |   |
|   |   |           |   | Officer, and Assistant Secretary (Principal  Financial Officer) |   |   |

 

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